Submitted by Jeff Snider, CIO of Alhamba Investment Partners [5]
A Final Word On Those "Robust" July Retail Sales
This current weak trend in a broad cross section of economic accounts and variables has been a big threat to the decouple/muddle through philosophy. Retail sales figures have been sharply lower in the most recent months, pointing very ominously to the exhausted state of that vital US consumer. So it was very heartening to the decouplers to see a nice, robust rebound in July that was almost totally unrelated to the renewed soaring cost of energy and food. The broad increase in retail sales figures, despite trends seen elsewhere however, seemed to be a bit of an outlier. ZeroHedge created a bit of controversy by noting more problems in seasonal adjustments (http://www.zerohedge.com/news/mystery-july-retail-sales-beat-solved-it-all-seasonal-adjustment [6]), only to be countered shortly thereafter by Morgan Stanley (http://www.zerohedge.com/news/morgan-stanleys-defends-retail-sales-seasonal-adjustments-crazy-zero-hedge-analysis-bac-upgrade [7]). So were the July figures muddle-worthy or otherwise?
It makes some sense that the difference in the number of shopping weekends is cause for large seasonal tuning to render a full apples-to-apples comparison between months. I am not so sure that a mid-week holiday would cause such a major need for imputations and extrapolations, but that is the nature of econometrics and the vain pursuit (and false comfort) of economic precision. Whatever the rationale, ZeroHedge rightly pointed out the inconsistency of results:
[8]
While there may have only been 4 shopping weekends in July 2012 vs. July 2011, that extra weekend found its way up into June 2012. Compared to June 2011, there was an extra weekend that did nothing to help the atrocious results (on a seasonally adjusted basis). Perhaps if we put the two months together to account for this shiftiness in Gregorian calendaring we can step outside these seasonal manipulations altogether. While the mainstream of economics pursues the false sense of precision that comes from these attempts, there is a much easier method of getting at what is far more important: the trend.
Using year-over-year changes strips out all of these econometric interventions into the data. Since these figures are raw, they are not adjusted for inflation either (meaning there is no argument over what properly constitutes “real” retail sales growth).
The retail sales figures from that perspective show a couple of very clear points: 1. Last year's Christmas season was not only weak and disappointing, it may have marked the inflection point in consumer spending (at least as far as retail sales measure); 2. The July "improvement" is far less impressive. June 2012 had an extra holiday shopping weekend, but registered only a 3.3% improvement over June 2011. Without an extra holiday weekend, July 2012 saw almost identical year-over-year growth; 3.4%. No matter what or how weekends were arranged within the calendar context, non-adjusted growth was not really all that inspiring in either month.
What may be worse is that since March unadjusted retail sales have consistently been running below the moving average. That demonstrates conclusively and unambiguously that momentum in the consumer segment is slowing. Inflections in retail sales, as you would expect given an economic system dominated by consumption, are followed by recessions. At this point in the “cycle” (such that there is a cycle outside of the mini-cycles created by central bank interventions) there is not much left to reverse the course.
As more and more Americans fall off the 99-week cliff into disability (best case) or the general abyss of the new structural joblessness, it is hard to see any monetary dosage or application that would be beneficial to the real economy. When you step back and try to analyze why there was an inflection in mid-to-late 2011, the combined impacts of waning job growth and exhausted government transfers under the umbrella of monetary-driven commodity pressures make for not just a tough environment or a muddle, but the reversal of everything that would be considered necessary for widespread economic health in any meaningful sense (there might be more dollars circulating but that is not really the true measure of economic success).
If this inflection in consumption is indeed valid, it makes sense that the early part of 2012 would then experience economic “volatility” – revenue pressures at firms cause them to cut back on capex or re-investment in real projects, including a decrease in the pace of hiring new workers. Manufacturing falls off (seen in the ISM and regional Fed surveys) as reduced demand from businesses works its way back into this vicious cycle of employment malaise where job growth is consistently and vitally below population growth or labor force expansion. As government transfers drop off, the segment of the economy under the gun of stagnation rises in proportion and the bifurcated economy becomes more so – except that as the troubled half grows it inevitably pulls down the half doing relatively well. What looks like a muddle of weak growth is really the rot of monetary intrusions eating at what should be a free market-driven reset to the previous dislocation of failures from past monetary episodes. And it is all in the name of some ephemeral “wealth”.
Stock prices may be higher, but the “wealth effect” is dead without the ability to turn paper portfolio values or tangible real estate “wealth” into spending through credit. It has always been about debt.
What might retail sales growth have looked like in the middle of the last decade without the $4.5 trillion in new mortgage debt and $500 billion in new consumer debt (added between 2003 and 2007)? As we are about to find out, the number of weekends and the placement of holidays would have been the least of the concerns.