The headline seasonally adjusted retail sales number slightly missed conomists’ expectations this morning, but beneath the headlines, the actual hard data tells a different story.
Nominal retail sales, not seasonally adjusted and not adjusted for inflation (or deflation), rose by $54.9 billion in March from February. March is always an up month. This month was better than the average increase for the past 10 years of $44.5 billion ($48.4 billion average ex 2008-2009). It was also slightly better than the March 2014 gain of $53.6 billion. On a top line basis, this was a strong performance.
On a year to year basis, nominal sales rose 1.6%, which was just 0.1% better than February’s 1.5% year to year gain. That was the smallest yearly rate of increase since a +0.9% reading in February 2013. 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. In 2012 there was a radical slowing in the growth rate since the bungee rebound years of 2010 and 2011, but since then the growth rate has been rangebound.
The rate of change graph may look ominous when we don’t consider the skewing effect of gas prices collapsing. Much of the slowing in the growth rate is attributable to the decline in gasoline prices, which reduced total nominal sales over the past 9 months.
Backing out gasoline sales and adjusting the nominal sales for changes in the price level over time gives a picture of real sales over time, without the counter trend distortion of large changes in gas prices.
Real retail sales excluding gasoline sales jumped by 13.3% from February to March. That’s modestly stronger than the average March gain of +12.6% for the past 12 years and about the same as the March 2014 gain of +13.2%. The annual growth rate was +1.6%, about the same as in February and somewhat above the low side of the growth rate range of the past 2 years, which was as low as slightly negative in early 2013.
To normalize the data for population growth I also divided by total US population resulting in a figure for real retail sales ex gas on a per capita basis.
Here, the picture looks stronger. The monthly change of +13.1% is stronger than the 10 year average for March of +12.2%, but the big difference is in the annual growth rate. At +3.2% it is well above the bottom of the range of the past 2 years. The growth rate has been trending up since the middle of last year when gas prices peaked. This shows that consumers have increased their spending on items other than gas, benefitting those sectors of the economy while energy production and sales suffer.
That’s a logical impact. What was illogical was conomists’ conclusion, including those at the Fed, that the US economy as a whole would be boosted. Transferring income from one sector of the economy to another does not add to total economic output.
In spite of this surge in spending, retail sales per capita ex gas are still below the peak housing bubble years of 2004-2007. Cash-out refinancing of homes in those years allowed people to spend more than their income would normally permit. This time around they have no such benefit, so the numbers lag behind those peak levels. However, the surge in the growth rate to above 5% in January could be a sign of spending exhaustion at this late stage of the growth cycle. Similar surges in 2004 and 2005 marked the “as good as it gets” stage of the housing bubble economy.
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 spending orgy, which may have exhausted itself in January when the annual growth rate hit +5.6%. February and March have been softer as an after effect of that surge.
Mid and lower income consumers have shifted their dollars formerly spent at the Mini Mart gas pump to WalMart, Costco, and maybe even the local car dealer. 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. Consumers have shifted some spending. But total spending will remain the same or decline. For consumers to spend more in total, their income must increase. For the bulk of Americans, that isn’t happening.
Lower gas prices have stimulated some times of retail spending. But the other shoe has yet to drop. That 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 effects of slowing oil exploration and production have yet show up in the broader economic data.
The invisible retail spending orgy since mid 2014 could be the final stages of a bubble. Only nobody realizes it yet. The pundits were too busy wailing over the misleading weak headline numbers in January and February. This could take a year or more to play out, but the canary may have already sung.