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Retail Sales Reports Right, But For Wrong Reason

Bloomberg got it partly right when taking the gloomy view it reported that, “Retail sales in the U.S. unexpectedly stagnated in August as a lack of employment and limited income growth restrained demand, highlighting the risk the economy will stall.”  Marketwatch took the glass half full approach, saying, “Retail sales were steady in August, as consumers spent more on essentials at gas stations and grocery stores, but less on cars,” while pointing out that the number missed expectations. “Excluding the volatile auto segment, sales rose 0.1%. Economists surveyed by MarketWatch had expected an increase of 0.3% for the overall number, as well as for the data excluding autos.”

It was pure happenstance that they got it mostly right. The reported numbers are seasonally smoothed, pure fiction. The raw, unsmoothed topline data was much stronger. It’s only when you drill down into the raw, unmanipulated data that the weakness is more apparent.

On an actual basis retail sales rose 2.2% from July to August. August is normally an up month. Last year the gain was 0.2% and in 2009 it was 1.6%. Sales fell 0.2% in 2008 in the middle of the economic collapse. In 2006 and 2007, the last 2 years of the credit bubble, sales were up 3.75% and 4.2% respectively. The average gain for the 5 years from 2003 to 2007 was… wait for it… 2.2%. So today’s report is right on trend for August.

The year over year gain is a more robust 8.4%. That number got virtually no media play. It sure doesn’t look like a recessionary number. However, much of that was due to the weak dollar in August 2011 versus August 2010. The dollar lost around 9% against major currencies over that span, attracting millions of shopping tourists to the US from around the world this summer. Much of the gain in sales was also due to inflation in gas prices and consumer staples.

Stripping out inflation and gasoline station sales to get a clearer picture of the underlying trend is revealing, both in terms of what it tells us about the current state of the economy, and what it might mean for stock prices.

Real Retail Sales Ex Gas Stations Chart- Click to enlarge


Indexing the graph of not seasonally fictionalized total retail sales to the graph of real, inflation adjusted sales excluding gas stations, a much clearer picture of the trend emerges. Real sales ex gas rose by 2.45% in August. That’s a solid gain. However, the year to year gain was only 3.2%, far less than the gain indicated by the topline unadjusted figure. It was also less than the 12 month moving average of the year to year gain, which is currently closer to 5%. While still positive, sales growth momentum remains in a declining trend. If much of that growth is a result of Canadians, Europeans, Asians and South Americans flooding into the US to shop, the late August reversal in the dollar from weakening trend to sudden strength could choke off that flow of retail spending cash, if it persists.

Furthermore, real sales ex gas are still down 6.8% from the August 2007 bubblenomics peak. Sales may be increasing, but calling it recovery is a stretch. Based on this data, the US conomy is still in a ditch.

The annual growth rate in retail sales ex gas appears to have some usefulness as an early warning indicator for stock prices. A weakening trend in this indicator seems to be a good leading indicator. As long as the growth rate continues to weaken, stocks are likely to remain in a downtrend. When this indicator begins to steadily improve for a few months, stocks should follow.

The bottom line is that there’s not much new here. There’s no reason for a market reaction of any consequence and nothing here that would cause the Fed to move off the dime and do any more than inconsequential Twisting at the FOMC circus next week.

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