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Strongest Retail Sales of the Century, But Pundits Fail to Blame Weather

As was typical of this morning’s reporting on the Commerce Department’s advance retail sales release for February, Marketwatch (Dow Jones) reported that the 1.1% gain (seasonally massaged) was the fastest in 5 months. It missed their consensus expectations, but only by a tenth of a percent. Bloomberg also touted the gain as the biggest in 5 months, with the gain being perfectly in line with their consensus survey expectation. Reuters had virtually the exact same headline and story lead-in as its two major competitors. They’re losing so much money that they can’t afford original reporting. Or to give them a little more credit than that, maybe they all just use the same computer Al Gore Rhythm to write the stories.

I don’t know how you can compare month to month seasonally falsified numbers to one another with a straight face, but the actual data wasn’t bad, even after adjusting for inflation and backing out gasoline sales, which skew the numbers. Given the way the mainstream media reports the data, it’s an accident when the actual data supports the seasonally fictionalized data, but in this case, that’s what happened. In fact, the media reports actually understate just how strong February was. To put it bluntly, the actual numbers were blockbusters.

Starting with the raw survey, actual data, retail sales for February came in at just under $380 billion. That was up a whopping 10.34% over February 2011. Even after adjusting for CPI inflation, it was still a 7.2% gain. That compares with a 7.4% year over year gain in February 2011. On that basis the economy seems to be perking right along.

February sales were up 4.6% versus January. That’s the strongest February gain of the 21st century. February is usually a little weaker than January because the weather is still lousy and it has 10% fewer days than January. The average month to month change over the previous 10 years was a drop of 1%. Even excluding recession years, the average change was -0.4%. That makes this February look all the more impressive.

When economic data comes up short of expectations, the pundits like to blame the weather. When the numbers are strong, as with this month’s retail sales, do you hear anyone giving credit to the weather? Everyone knows that the weather was springlike in February in most of the US. Temperatures were well above normal. Not to be a spoil sport, but that probably had something to do with the strong sales, and it could represent demand pulled forward from the spring shopping season. Good for February, not so good for March and April.

As I explained the last time I looked at this data, I like to subtract gasoline sales. Gas prices are volatile and gas sales account for nearly 10% of total retail sales. Big changes in gas prices can abnormally skew total sales in a counter trend way, because gas prices act more like a tax. While adding to total sales when gas prices have risen as they did in February, that actually subtracts from discretionary spending and other retail sales. When gas prices have dropped, that reduces total sales but actually adds to discretionary spending and other retail sales. When gas price changes are small, the impact on overall sales trends isn’t material, but large changes in gas price levels over time can create a false impression regarding total retail sales.

The chart illustrates just how far out of whack nominal total retail sales have gotten versus real retail sales ex gas. The red line is nomimal retail sales before any adjustments. They appear to be booming. The dark blue line represents real retail sales with gasoline sales removed. That trend is far less robust. In fact, February was the first time that this index exceeded the record high for the same months, set in 2007. It has taken 5 years for unit sales excluding gasoline to recover to where they were then, and there are about 5% more people in the US today. It’s an indication that more people are falling behind, and fewer people are doing better in the US. Trend growth has been anything but robust, but the past 12 months have shown some acceleration.

Real Retail Sales Ex Gas Chart- Click to enlarge
Real Retail Sales Ex Gas Chart- Click to enlarge

After backing out gas station sales, the 12 month change was 6.7%, which is not too shabby. The month to month gain was a strong 4.9%.  Again, that’s the best gain since 2000. Any way you slice it, this is a strong report.

What does any of this have to do with stock prices? There has been some correlation between the rate of change in retail sales ex gas and stock prices. It appears that changes in the momentum of real retail sales ex gasoline lead significant moves in stocks. The growth rate trended down from February to July of 2011, foreshadowing the summer break in stocks. But from 2004 to 2007, stocks kept rising even in the face of steadily weakening growth in this indicator. So the period of negative divergence can be very long before stock prices break. The current annual growth rate of 6.7% is consistent with a strongly bullish stock market.

Both negative and positive divergences between the growth rate of real retail sales ex-gas and stock prices have given useful signals at times. At the moment, there’s no negative divergence. As long as this growth rate indicator stays on the positive side, a bear market or even a big intermediate correction, doesn’t look likely. However, if the reason for February’s surge was the weather, then retail sales growth will slow over the next couple of months. If stocks continue to advance while retail sales growth weakens, that would set up the kind of negative divergence that usually leads a big correction. The timing could be remarkably similar to last year and 2010, when the stock market topped out in April or May, and broke in May or June.

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3 Comments

  1. alex west

    hello Mr. Adler!

    you seems like a nice guy, but your level of analysis is kind of weak..
    let me give an example..

    in your reports you don’t believe official adjusted figures, and that’s fine.. its just a gov propaganda I agree
    but on other hand you somehow try to convince readers that RAW , UNADJUSTED data is good..

    here your quotes :

    # don’t know how you can compare month to month seasonally falsified numbers to one another with a straight face
    ## Starting with the raw survey, actual data, retail sales for February came in at just under $380 billion.

    but how can you believe in RAW data? its collected by same gov entity.. didn’t occur to you that this raw data is also massaged? how can you prove that this data is correct ?

    let me give you example.. its latest qrt report from WALL-Mart.. you know biggest retailer in world.. accounts for 10% of all retail sales (excl auto).. 4th qrt results y/y – USA operations 2.4%, Sams club – 6.8% (Sams club sales 5x less in sales)

    don’t you think Wall-mart is pretty good proxy for retail sales? don’t you think that in times of +45 mln on food stamps and 20% of under/unemployment bunch of people are shopping in WMT? I do..

    so how is it possible to have 10% growth in Feb 2012 (according US gov),
    and somehow biggest proxy of sales shows just 2.5-3% growth in 4qrt 2011 and that not inflation adjusted and includes gas sales?

    HERE’S MY PROPOSITION..

    THERE IS NO USE IN GOV DATA , period

    instead of compile data from 20 biggest retailers USA (use qrt reports), that will be best proxy for overall retail market .
    I know your data will be late , but at least we gonna have some kind of confirmation..

    do this, I might consider paying you for that kind of QUALITY ANALYSIS..

    good luck, and dont consider this as offense

    alx west

    ps
    http://media.corporate-ir.net/media_files/irol/11/112761/quarterlyresults/Q4FY12ReleaseFinal.pdf

  2. Lee Adler

    No offense taken. If you look at the chart, it does show weakness in Q4 as you point out. Growth was below trend. Since Q1 data from the retailers is not yet available, we’ll have to wait and see if it confirms the strength in the survey data.

    The problem is that if the data doesn’t fit your view of the world, to just say the data is no good, is not logical. This data is not inconsistent with reams of other data that I look at, such as a huge bulge in withholding taxes in January, and a big jump in tax refunds in both January and February. There was definitely more spending money around for the last 2 months. I sincerely doubt that every shred of data is falsified. Finally, the markets confirm it.

    There’s more cash out there at the moment. My liquidity analysis has been firmly bullish for a couple months and the markets have followed the script.

    But we’ll see when the retailers report for Q1. If their numbers are lousy, then you’re right. This data is no good. But if you’ve been short the market because you don’t believe the data, well, my heart goes out to you and anyone who is getting slaughtered on the short side. I’m a long term bear, but I try to take an unbiased view on behalf of my subscribers. If they’ve listened to me, they have not been hurt in this rally, and they may have even profited from it.

    Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and begin your risk free trial NOW!

  3. alex west

    #
    The problem is that if the data doesn’t fit your view of the world, to just say the data is no good, is not logical.
    #

    or no.. all non-gov data is totally fit my view of world..

    couple examples

    http://www.calwatchdog.com/2012/03/13/eureka-california-revenue-plunges-22/
    State tax collections for February shriveled by $1.2 billion, or 22 percent, as compared to a year earlier. The deterioration is more than double the shocking $535 million reported decline for the previous month, January.

    http://www.ceridianindex.com/news/release/February-PCI-Increases/
    In December 2011, the year-over-year growth turned decidedly negative at -0.8 percent with January 2012 even worse at -2.2 percent; February year-over-year was only slightly negative at -0.2 percent.

    so somehow GOV report says “10% growth in sales”, but non-gov report says that ‘real-time fuel consumption data for over the road trucking ‘ was falling for 3 month in row, and in Feb too.. and tax collections in biggest state in USA (probably 6-7th biggest economy in world ) fall in Feb too y/y.

    #
    such as a huge bulge in withholding taxes in January,
    #

    as far as ‘huge bulge in withholding taxes’ you ,Sir , pay too much attention to month to month gyrations..

    here’s stats that onloy matters : GROSS TAXES 12month sum are growing barely 1% year over year.

    so how is it possible to have growing population, so- called growing economy 2-3%, growing labor market almost by 2 mln, avg salaries up 2-3%, inflation official 2-3% ( street inflation is closer to 5%) and gross taxes are barely up.. ?

    that means that real , inflation adjusted, consumption is falling, probably closer to 7-8%. people eat less, go out less, buy less cars and etc..

    good luck
    alx

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