Observations On Retail Sales And Consumer Strength
Earlier today we saw a release of total retail sales data. Not surprisingly, the immediate relase from the Cleveland Fed was one which tried to point the 1.5% September decline in a favorable light.
Total retail sales slipped down 1.5 percent (nonannualized) in September, due in large part to an 11.8 percent drop in auto sales as the CARS incentives rolled-off. Excluding autos, retail sales rose 0.5 percent during the month. Elsewhere, sales gains were relatively broad-based, with only a few categories (building material & supply dealers, miscellaneous store retailers, and nonstore retailers) posting decreases during the month. One of the addenda measures meant to get at “core” retail sales—sales excluding autos, building supplies, and gas stations—rose 0.5 percent in September, following a 0.7 percent increase in August pulling its 12-month growth rate up from −1.8 percent to −0.3 percent during the month. Over the past 3-months, the “core” series is trending at an annualized rate of 4.0 percent, a tentative sign that consumption may be starting to firm.
Yet the core issue here, as well as elsewhere as pertains to the overall economy, is the $64k question of what is the true state of the US consumer and primary GDP driver, with all the "money on the sidelines" and presumed paper profits from a surging stock market. Moody's provides some perspectives on what to expect going forward from the increasingly more thrifty US consumer base.
With the fall of Lehman Brothers on September 15, 2008, the economy and retail entered a new world, with consumer spending dramatically reduced during the back half of that “month of demarcation.” In order to get a true read and to improve the efficacy of comp store sales analysis, it is therefore instructive to look at September 2007 performance to see how far the top line has really eroded over the past two years. The chart below provides comparable store sales results for select key retailers for September 2007, 2008, and 2009.
We continue to feel that Holiday 2009 revenues will be modestly down, and profits will be up, from 2008s, with any surprises most likely to occur on the downside. There do not appear to be any macroeconomic forces at work that would lead us to conclude that the consumer will be better positioned to spend during the balance of 2009 than he/she was during the similar period of 2008.
A key factor that we will focus on will be third quarter-ending inventory levels. Although they will most certainly be down from 2008 levels, they may not have fallen enough to avoid the rampant pre-Christmas discounting that took place in 2008.
Apparently Moody's is not buying the broader argument tosses around by pundits that simply as a result of burgeoning 401(k)s (which are still materially below historic levels), the average consumer will toss aside prudence and in a world where jobs may be lost overnight, is unlikely to reinforce the positive-feedback spending cycle. However, as we anniversary Lehman and with Q4 results finally being seen on a true apples to apples basis in the "new normal" environment, coupled with corproate expectations for not just "less declining" but actually increasing EPS, and the Q4-Q1 2010 boundary may be one that very well tests market which as the realists note is priced not just to perfection, but to growth well beyond the expectations of a simple V-shaped recovery.