There was nothing especially scary in today’s retail sales data. There was certainly nothing very surprising.
Yes, I know the headlines played up the 0.5% drop in consumer spending in June. And the fact that this marked the second decline in a row after the 1.1% drop in May. And the fact that the 0.5% retreat was worse than the consensus call for a 0.2% falls.
But repeat after me: I never stop with the headline number on any government data—whether from the United States, China or anywhere else.
First, in looking at the retail sales number it’s good to take out the very volatile numbers for car sales, gasoline (highly seasonal), and building materials (the government just ended a big home buying subsidy). If you look at retail sales minus those sectors, the small June drop turns into a modest June increase of 0.2%. That number is in line with expectations among economists.
Second, weakness in retail sales is par for the course at this stage of an economic recovery—as is slowing in the economy in general. You can see this expected weakness in the economy playing out in the inventory data released today by the Department of Commerce.
Inventories increased by just 0.1% in May from April.
In the early stages of a recovery companies buy in order to build up the inventories that they ran down during the recession. With customers sitting on their wallets, companies saw no need to buy to replace the goods in inventories that were only slowing selling. With signs of a recovery, companies start buying for their inventories again—and that adds to the economy’s rate of growth.
But at some point in most recoveries the pace of inventory buying slows—companies have caught up with their inventory needs and start to buy only as much as they sell. That results in a slowdown in the economy’s reported growth.
Nothing unusual here. But it does result in some cutbacks in overtime and in the number of temporary jobs. Those reductions play out in a job market that stops adding jobs and in lower retail sales as consumers cut back in response.
An inventory slowdown like this usually doesn’t lead to a big or lengthy drop in economic growth in general.
The big question now is whether something—China and the developing world or an end of the worst of Europe’s debt crisis—will pop growth to a higher path or whether we’re stuck in this slow growth rut.
That’s the question today’s retail data raised. Of course, the data didn’t provide any answers.