The stock market is rallying today because investors think that weak retail sales mean that the Fed won’t raise interest rates any time soon. But they’re wrong. Retail sales were not as weak as the headline numbers made them look.
The headline number for retail sales flummoxed the “experts” again this month thanks to the screwed up way in which they’re reported. As a result, we have to do a little digging to find the real underlying trend. I’ve done that for you, and the data suggests that nothing much has changed. Retail sales remain in the same tepid uptrend that they have been since cooling in 2012. They are not declining as the headline writers and Wall Street pundits would have you believe.
The US Census Bureau reports retail sales on a nominal basis, which accounts for neither inflation nor those brief periods where retail prices actually fall, as the did over the past couple of months. The total sales figure also includes gasoline station sales which are large enough to have a significant impact on the headline retail sales, especially when gas prices have collapsed. It makes the topline look worse than it otherwise would. Plunging gas prices have taken $10 billion off the top line over the past 12 months. That’s 2.6% of the year ago total retail sales. The end result is that when sales don’t meet expectations, mainstream media headline writers scratch their butts and then post excuses like this Wall Street Journal headline.
In the game of pin the tail on the expectations this was a big miss. The consensus of conomic shills was for a 0.4% gain.
The headline number is the seasonally fudged fictional representation of reality. Here’s the actual data.
Nominal retail sales, not seasonally adjusted and not adjusted for inflation (or deflation), fell by $11 billion in February versus January. February is a swing month, sometimes up from January and sometimes down, but with a slight edge to the downside on average. The average decline for the past 10 years was less than $1 billion. The January 2014 decline was $3 billion. The current number was in fact weaker than is typical for the month. But that includes the impact of the collapse in gas prices, as well as slightly lower prices overall.
On a year to year basis, nominal sales rose 1.2%, which is the smallest yearly rate of increase since a +0.9% reading in February 2013. This is well below the average growth rate of +4.1% for the past year. It is at the low end of the rate of change of the past 2 years but it is still within the range. There’s no evidence here yet that the economy is sliding into a ditch. There has been a radical slowing in the growth rate since the bungee rebound years of 2010 and 2011, but all of that slowing occurred in 2012. Since then the growth rate has been rangebound.
The rate of change graph looks ominous when we don’t consider the skewing effect of gas prices collapsing and changing general price levels.
So I backed out gasoline sales and adjusted the nominal sales for changes in the price level over time. I used CPI through January and estimated February CPI using the State Street PriceStats measure, which CPI tracks closely. To normalize the data for population change I also divided by total US population as estimated monthly by the census bureau. The net effect is to produce a figure for real retail sales ex gas on a per capita basis. The result looks like this.
Adjusted for changing price levels and population, it’s clear that retail sales, on items other than gas, did plunge in February, but rather than any substantive shift of the trend, it looks like giveback after they had risen markedly since the middle of last year. While the top 10% of the income spectrum does most of the spending, the gain that took place from the middle of last year through January was still a remarkable surge. Hidden beneath the headline numbers was a veritable orgy of spending, which may have exhausted itself in January.
The annual growth rate of real retail sales per capita was +3.2% in February. The growth rate had been rising for a year and in January it spiked to a year to year growth rate of 5.6%. That was the highest growth rate since November 2010 at the peak bungee rebound phase of the recovery. So February was a bit of a chill but the trend is still up.
Per capita sales dropped in February by 3% month to month. The 3% drop was the worst February since 2009, when the drop was 4%. It is also much worse than the average decline of 0.4% in February. Wall Street analysts are blaming the weather. I suppose we will have to wait till next month to know for sure. The chart does suggest that February’s performance was on trend.
Some consumers clearly have shifted their dollars formerly spent at the Mini Mart gas pump to WalMart, Costco, and maybe even the local car dealer. I have thought all along that it’s stupid to expect that consumers spending less for one type of good will suddenly be able to increase their total spending. Conomists haven’t figured out yet that that’s not how it works. When non discretionary spending declines thanks to a drop in gas prices, discretionary spending may or may not increase, depending on whether people opt to spend, save, or pay down debt. But total spending will remain the same or decline. For consumers to be able to spend more in total, their income must increase, and for the bulk of Americans, that ain’t happening.
So we’ve seen some gains in some types of retail spending while gas sales are much lower, thanks to the lower price (Consumers are buying more gallons of gas by the way). But the other shoe has yet to drop. That other shoe is the weakening that will occur from the layoffs of highly paid oil and gas workers, plus the shutdown of orders of related machinery, equipment and materials, and the major ripple effects including job losses and the accompanying decline in spending that will follow. Those are still in the works.
The yearlong invisible retail spending orgy, which no mainstream pundits see, looks to me like the final stages of a bubble. Only nobody realizes it yet. They have been too busy wailing over the grossly misleading headline numbers for January and February. If you exclude the bungee rebound year of 2010, the last time the growth rate of real sales ex gas was greater than 5% was in mid 2005, when the housing bubble was at peak orgy. It wasn’t sustainable then and it’s not likely to be sustainable now.
In the months ahead, the headline numbers will probably begin to catch up to the real trend and move higher faster than conomists expect. That would surprise Wall Street and it would further encourage the Fed to begin the shell game of trying to raise rates.
By the next couple of Fed meetings, the Fed will have all the ammo it needs to raise the curtain on the circus act of pretending to raise interest rates. The markets will enter a new chapter of the ongoing soap opera, General Rates Hospital.