Retail Sales Conundrum

MarketWatch is reporting Retail sales jump 1.4%, biggest gain in 16 months

Gasoline, clothing, autos lead higher-than-expected gains for May.

U.S. retail sales rose by 1.4% in May, the largest seasonally adjusted gain in 16 months, the Commerce Department reported Wednesday.

The report should reassure markets and policymakers that consumers are regaining their footing after a very weak start to the spring. Economists had thought consumers would slow their pace of spending in the second quarter in the face of much higher gasoline prices.

Estimates for second-quarter growth will be pushed higher than the current 3% median forecast. Lehman Bros. bumped its estimate to 4% from 3.6%. April's sales were revised higher by a tenth to a 0.1% decline.

Inflation accounted for much of the sales gain in May, but by no means all of it. Gasoline sales rose 3.8%, driven by record prices at the pump. Sales excluding gas rose 1.2%. Gas prices are expected to ease slightly, but remain above $3 a gallon for the remainder of the summer, the Energy Department estimated Tuesday.

Conundrum? What Conundrum?

Inquiring minds might be asking where's the conundrum? There are at least two. For the first let's check out things #1 and things #2 in today's Five Things with Kevin Depew on Minyanville. Kevin Depew was talking about retail sales and import prices in those things.

1. Retail Sales

• Retail sales in the U.S. jumped by the most in more than a year last month as Americans flocked to shopping malls, undeterred by record gasoline prices and falling home values, determined to empty their wallets of all traces of dollar-denominated paper and plastic.
• Retail sales are now running at a plus 5 % pace year-over-year.
• The increase was broad-based with clothing and clothing accessories stores up 7.8% and sales of nonstore retailers up 7.7%, the report said.
• Even retailers that had previously seen declines related to housing weakness showed increases, with furniture retailers' sales rising 0.3% and building material and garden supplies dealers rising 2.1%.
• No categories showed decreases in the report.
• But wait, how can this be happening? Aren't rising prices for gasoline and food combining with declining home prices to conspire against retail sales and consumer spending?
• Those very questions lead us to today's Number Two...

2. Import Prices

• Import prices rose 0.9% in May after the 1.4% jump in April, according to the Labor Department.
• Expectations were for a more modest increase of 0.2%.
• Naturally, petroleum was a significant factor, up 2.7% in May, though that increase was far below the 6.6% increase in April.
• But the report exceeded expectations even ex-petroleum, up 0.5% in May (the largest gain since last November) thanks to a rise in industrial materials such as metals, which increased in price for the sixth month out of seven.
• Excluding all fuels import prices rose 0.4%, which was the largest increase in nearly a year.
• Also of note, though undermentioned, capital goods imports were flat, but that follows three consecutive months of declining prices for capital goods imports.
• Finally, consumer goods-ex automotive prices were again flat in May.
• The surge in imported inflation should keep everyone on edge ahead of tomorrow's Producer Price Index and Consumer Price Index data.
• And so we have the "New Conundrum" - consumer spending rising in the face of increasing prices paid for gas and food, and declining prices received for homes and labor.

Another Conumdrum

That's the conundrum that Kevin sees. Perhaps another mammoth jump in the negative savings rate will show up later to help explain it. I see a different conundrum. The devil as usual is in the details:

Details

• Auto sales rose 1.8%, the government said, but the automakers reported a decline in unit sales.
• Sales at the malls were strong according to the government (the biggest increase in 19 months)despite tepid reports from the retail chains.

A Big Disconnect

Why the difference between what the government is saying and retailers are reporting?

I'm not the only one asking that question. Please consider Financial markets reeling from economy's turn.

A few months ago, it looked like the U.S. economy was on its sickbed. The economy grew at an anemic 0.6% pace in the first quarter. And the future looked a little bleak, with the continuing collapse of the housing market, the slump in the factory sector and a credit-strapped consumer faced with $3.25-a-gallon gas.

Now, that's all forgotten (except that housing is still mired in the swamp).
The consumer is back. Wednesday's retail-sales data from the Commerce Department were uniformly strong -- the best since early 2006.

However, the retail giants didn't report a blockbuster month in May. In fact, they were working hard to lower expectations and issuing warnings that the consumer wouldn't be free spending if gas prices stayed high. Automobile makers had another off month.

There's a big disconnect between the government's spending data and what the companies are reporting. It could take months to sift through the differences.

So who do you believe, the government or the retail stores? Either? Before you answer, Scott Reamer on Minyanville pinged me with this comment:

"Commerce rigs this data all the time and goes through wrenching revisions later on. The net of the data is this: retail sales less autos, bldg materials and gas stations (so called core retail sales) were up 2.6% y/y. The CPI is up 2.6% y/y. Voila...you have effectively 0% real core retail sales in May and that is WITH their gaming the numbers."

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/