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.
Yes, yes – the government can and will provide massive support to autos and housing, and let’s not forget – bailing out banks that created their own problems simply out of greed.
And, yes, unemployment support has ended and the Republicans are, as always, fighting tooth and nail to not extend them — after all, why help American families, when you can help corporations instead. So it goes…
And one day, GOOG will slide, too. Success invites competition, margins diminish, and P/Es contract.
javos – yes I distinctly remember CSCO at $81 at Dot Com height, I was long CSCO. It seemed like a century ago and I doubt CSCO will ever approach that level again.
I would recommend to all readers that if you’re not already doing this, begin reading commentary of such economist stalwarts as:
Mohammed El-Erian, PIMCO
Paul McCully, PIMCO
Jan Hatzius, Goldman Sachs
Martin Wolf, Bloomberg
Paul Krugman, NY Times
Ambrose Evans-Pritchard
et al
These commentaries will provide a macroeconomic vision that will strengthen or weaken the microeconomic analysis of individual equities.
Remember Cisco, an absolutely outstanding company in an enviable market, once sold for $81, dropped to $9, was recently at $12, now struggling to stay above $20. The point, great stocks will swoon or prosper with the general market.
Opps I should have said started losing at the end of May not the end of April.
Now here’s something that really will affect future sales…one million home foreclosures, up from 900K in 2009, and the re-recession 100K. Those people occupying homes being foreclosed are being foreclosed because they haven’t been paying their mortgage, i.e., living in the house for free. Now they must rent (or move in with family), and their disposable income will decrease accordingly. THAT will affect retail sales!
From Bloomberg:
Wholesale prices in the U.S. fell in June more than forecast, pulled down by lower energy and food costs, a sign the economy is recovering without inflation.
On the way to work today, I saw some birds flying without wings. By the way, did I mention that I put the Brooklyn Bridge on sale and I am throwing in the Manhattan Bridge in for free without any strings attached. 🙂
I would add to Christopher’s post that those losing unemployment checks were likely buying only necessities anyway, and even the loss of the weekly check will not substantially effect the sales of necessities. That said, all of us should do what we can to keep our local community food banks adequately stocked, for that will the only hope for many.
Inventories and emploment are going nowhere until consumers and exports expand.
Inovations seem to be in the tech sector and all recent infrasructual expansion in the BRICs. So far these equities have followed the market, so I’m waiting… holding big caps wih decent div.
Banking and housing are hopelessly intwined and the only way I see for that to change is still lower R.E. values…about the only inovation housing can produce.
littlefish,
Actually the unemployment checks for some stopped on April 30th. When people stop getting checks depends on where they were in the cycle come June 2, because they will continue to get their normal 26 weeks or current “tier” of extended benefits until it is exhausted, but will not be able start a new tier of extended benefits without congress passing another extension, which of course has not yet passed. So there is no clear cutoff of when people will stop getting unemployment, but yes many are losing benefits each week.
If you’ll pardon the expression, “CRAP!” Jim, you so glibly eliminate auto and housing sales declines as inconsequential. The contraction in BOTH industries have driven unemployment skyward, and the housing slide continues to erode consumer balance sheets. Until you see health in these industries, you will continue to see declines in everything else except jewelry and yachts!
Why do you think we’ve had massive government support of housing and auto sales? And why does the government continue support of major banks whose balance sheets are now overflowing with non-performing mortgages on literally empty and rotting houses.
Come on, Jim, take off your rose-colored glasses.
The retailers would sell more “stuff” if they would stop selling all the same “stuff.” It doesn’t matter which chain retailer you visit, because it looks and even smells pretty much like all the others. The employees lack the skills to actually sell the merchandise – they only know how to operate the cash registers. Who would buy anything?
AgriBank Headed for Smaller Shanghai Debut Gain Than Rivals
Not a very good sign!
http://noir.bloomberg.com/apps/news?pid=20601087&sid=ap_ZMOUoqB_Y&pos=3
Reminder: Unemployment benefits ended for many Americans on June 30th because the economic stimulus did not pass. Impact on July & August retail numbers? Stay tuned . . .
I have much respect for you Mr. Jubak as I really enjoy reading your articles….But you sound like the government taking out food and energy and then deciding there is no inflation! Any statistic can be manipulated by removing and adjusting for this that and the other thing…Why not just report retail numbers measuring iphones and ipads? Let’s call it for what it is…A very bad number, period! The data does not lie unless you pick and choose to put a spin on it!!!
i agree with marr.bo. i must say you’re articles rarely show any ideological color, or try sell anything. that’s refreshing talking about headlines! only actual facts count and you dig them out for us. thanks indeed!
and yes what’s puzzling is that we can’t seem to see any source of strong growth, short term. i’m rather a technician and to me that’s why the stock market is testing its 200 days moving average resistance. eg the market can’t see what could make it jump above it.
so if markets starts going down from here it ‘d be a very strong sell signal, but since nothing is really bad in the economy, and since stocks did come back head above water they still may drift up.
Thanks for the insights, Jim. Its these articles that look beneath the hood of official numbers that are some of the shiniest gems you produce.
Actually, we seem to be trapped between VERY modest growth in some sectors, and VERY modest declines in other sectors. In other words, we’re going nowhere fast.