Retail Sales Reports Are Right for the Wrong Reason

Retail Sales Reports Are Right for the Wrong Reason

Courtesy of Lee Adler of the Wall Street Examiner

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 top-line 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.

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 top-line 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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Comments

[boiltherich]

Ilene, you say "Stripping out inflation and gasoline station sales to get a clearer picture of the underlying trend is revealing..."

I say that the August CPI came in at 0.5% which is not even half the rate I have experienced, and some people do come to America to shop, about 0.00001% of the total number of shoppers are foreigners looking for bargains. 

We also see the import/export prices this week, export prices M/M change +0.5% and Y/Y up 9.6%.  Import prices M/M were actually down four tenths of a percent entirely due to oil and gasoline, and imports were up by 13% Y/Y. 

Those are the prices paid to and charged to foreign business, but in effect they are wholesale since once received they go to retail and get marked up again, so retail of those imported goods was even higher than that 13%.  Yet we are to believe that CPI is only up by 0.4%? 

If you believe that inflation data as reported by the BLS is an actual and realistic number then you may look at reports like retail sales and make cogent arguments about trends.  If, like me, you believe that real price increases for almost everything you can buy are grossly underreported then you have to figure out what the real inflation rate is and strip out the difference.  No matter what that number is it lowers the dollar value of any sales. 

I have watched same store sales, retail sales, all the Fed data that uses sales, ISM Manufacturing, etc. and see month after month of positive growth leading to bullish pronouncements about the recovering economy, how the recession ended years ago, and yet I go to our local mall and the place is nearly empty.  Because any report that uses dollar value for the change in levels but does not adjust for a real inflation rate is just worthless, worse than that it is fraudulently misleading. 

If you read reports that list units sold, autos, existing homes, bridges to nowhere, etc. then you can get a more unbiased view of actual economic activity, but to look at dollar denominated charts which show up trends when the reality is a flat economy then what you really have is nothing but a chart of inflation.  I say inflation is north of 8% so when the retail sales number is 2.2% then we probably had more like a 6% decline in actual sales, a month in which back to school buying should have driven the number higher and it probably did too, meaning sales for everything else were even lower yet. 

This jibes with many other reports like more people leaving the labor pool, those in the labor pool are now making the same as they made in 1997 (again adjusted by a bogus low CPI number, in reality it is probably the same income as in 1985) falling tax receipts, lower fuel demand, consumer credit contraction, I mean really, if consumer credit is contracting and savings are rising, even as incomes are falling how can retail sales be rising?   Consumers have less cash to start with, of that they are saving more, and they are reducing their use of credit cards, yet retail sales are rising?  That is a gobslobulously large number of foreigners coming all the way to North America to shop. 

[ilene]

Reply by Lee: Can’t argue with the idea that inflation is understated, and that therefore even real sales are overstated. By how much? Does that affect the usefulness of the data as presented? The bottom line is always what the data can tell us about how to invest. I understand and agree with the argument, but have no clue how to present it in a way that would make it a useful tool for strategic investment decision making.

Here's another article you find interesting: http://www.philstockworld.com/2011/09/15/what-inflation-means-to-you-ins...

[boiltherich]

That is just the problem, one cannot make informed decisions about anything lacking good data.  Be it inflation data, monetary aggregates, supply or demand data, price to earnings data, how do you fairly value a stock issue when the book value information is loaded with gobbledygook accounting frauds?  Or if earnings are inflated by fancy footwork on the balance sheet? 

I have a bachelor degree in finance and I would not invest a dime in anything more complex than silver, and after reading ZH it seems even that is grossly manipulated.  When investment values and economic conditions are politically determined by the whim of politicians to keep markets appearing healthy in order to allow governmental budget insanity to go on a while longer then discussion of data in reports that are as much works of fiction as real information is so much time wasting.

[ilene]

Btr, thanks for your analysis. I'm going to send it to Lee to see if he has any comments. Without any statistics or charts or other "official" numbers I would agree with you - based on my experience - real inflation is quite higher than reported. I've noticed insurance prices going up a lot recently, food prices, property taxes in my state, to name a few that are substantial budget-drains. With regard to food, packages have gotten smaller and there is no requirement that measured prices reflect the smaller package sizes, i.e. if the price stays the same, but the package is a little smaller, this may not get recognized as inflation - I've read about that, and unfortunately didn't save the link to the article tho wish I had. - Ilene 

[Robslob]

Good thing algos only read Headlines!

[waterdude]

Talk about over analyzing one single, sort of important number.  Guy must be a total killer on the cocktail party circuit.