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Friday, December 11, 2015 10:33 AM

Retail Sales Soft Again (Unless You Exclude Everything Weak); How to Uncover the Hidden Consumer Strength!

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Retail sales disappointed once again today. And for the second month in a row, autos led the decline.

Last month retail sales rose 0.1%. This month retail sales rose 0.2% vs. a Bloomberg Consensus Estimate of a 0.3% rise. Nonetheless, Bloomberg analysts cite hidden strength.

Hidden Strength?

Once again the headline for the retail sales report understates underlying strength. Total retail sales rose only 0.2 percent in November which is just under the Econoday consensus. But weakness here came from vehicles of all places which otherwise have been one of this year's standout component for this report. Excluding vehicles, sales rose 0.4 percent which is 1 tenth above expectations. Excluding both vehicles and gasoline, core sales rose a very solid 0.5 percent which is 2 tenths above expectations. A key discretionary category, restaurants, shows yet another very strong gain, this at 0.7 percent in the month. Also showing sizable gains are electronics & appliances, clothing & accessories, non-store retailers (once again), and the general merchandise category where, despite a deflationary pull from falling import prices, sales jumped 0.7 percent in the month.

Vehicle sales fell 0.4 percent in the month on top of October's 0.3 percent decline. These declines are a bit of a surprise given steady readings in unit sales of vehicles which have been holding firmly at 12-year highs. Whether there's a rebound ahead for vehicle sales, which had been so strong through the year, will be key to consumer spending going into the new year. Sales at gasoline stations continue to contract, at minus 0.8 percent in the month. Furniture sales, which have been strong, fell back as did sales of building materials & garden supplies, which have been soft.

Year-on-year rates show nonstore retailers out in front, at plus 7.3 percent to confirm acceleration for online sales. Restaurants are right behind at plus 6.5 percent year-on-year followed by furniture and by sporting goods, both at plus 5.4 percent. All together, core retail sales are up a moderate 3.6 percent year-on-year held down by contraction in electronics & appliances and soft readings for grocery stores and general merchandise. Outside the core, motor vehicles are still in the thick of things, at plus 4.0 percent year-on-year, with gasoline stations down 19.9 percent. Total retail sales are up only 1.4 percent but the gain goes up to 3.6 percent (the same as the core) when excluding just gas.

Taken together, rates of growth are no more than moderate but certain areas are posting eye-catching results, results that point to what must have been a successful Black Friday sales push. The consumer, boosted by a solid labor market and having more money to spend because of low gas prices, is definitely alive and spending going into the final weeks of the holiday season. In a methodology note, the November data reflect a new sample and prior levels have been revised (mostly lower).
Exclusionary Process

It's amusing how much analysts go out of their way to ignore everything bad in a report. Take the case of autos. All year, autos have been one of the leading retail sales components. For the last two months they haven't. Earlier this year, analysts were cheerleading autos, today they say ignore autos.

While we are at it, let's exclude gas. If we ignore gas, retail sales are up 3.6%, but only up 1.4% including gas. That's obviously a strong case right there for ignoring gas.

Last month, on November 13, I reported Retail Sales Weaker Than Expected, Led by Autos; Car Boom Ending?

Here are my lead paragraphs from a month ago.
This month the retail sales consensus expectation was for a 0.3% rise.

The actual reading was a gain of just 0.1% for the month. In addition, last month's retail sales were revised lower to +0.0% from an initial reading of +0.1%.

This was the third consecutive weak report.

Nonetheless Bloomberg managed to put an amazing amount of lipstick on today's report.
This is how Bloomberg analysts saw things on November 13:

Bloomberg: "Retail sales slowed in October but fundamentally remain solid. Sales rose only 0.1 percent, 2 tenths under the Econoday consensus. But when excluding vehicles, which slipped back after surging in prior months, and when also excluding gasoline stations, where sales once again fell on price weakness, core sales rose a respectable 0.3 percent which hits the consensus."

What did Bloomberg say in September?

I just happen to have that answer in my September 15, report Retail Sales Rise Thanks to Autos; Industrial Production Sinks Thanks to Autos; Last Hurrah for Autos?

Bloomberg: "Turning first to strength in the August data, motor vehicles rose 0.7 percent on top of July's 1.4 percent gain. These are very solid readings for a very important component that points squarely at a healthy and confident consumer."

In September autos pointed "squarely at a healthy and confident consumer". Obviously we need to include autos in our September analysis.

What did Bloomberg say in October?

I happen to have that answer in Autos and Restaurants Positive in Overall Weak Retail Sales Report; Last Month's Sales Revised Lower.

Bloomberg: "And there are plenty of tangible positives in the data including a third straight solid gain for motor vehicles, at plus 1.7 percent in September, and a second straight outsized gain of 0.9 percent for restaurants. Both of these are discretionary categories and point to underlying consumer strength. Clothing stores are also posting strong gains, up 0.9 percent despite negative price effects from lower import prices."

Four Months of Hidden Strength

Autos don't matter now, and they won't until they will. They will the next time autos rise. Gasoline sales never matter until gas prices start to rise again, and then they will.

Uncover the Hidden Strength!

I suggest Bloomberg uncover what's hidden and produce a chart that shows the strength. All they have to do is strip out those things that sometimes matter and sometimes don't, while always removing things that never matter, until of course they do.

Then the strength will no longer be hidden and everyone will be happy.

Questions to Ponder

Is it good for GDP that people are buying junk (likely from overseas), instead of autos which are likely to be domestic?

Have autos peaked? I think so.

Mike "Mish" Shedlock

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