Retail Sales - You Can't Blame It All On Sandy
The release of the retail sales report for October missed estimates coming in at -0.3% versus last month's upwardly revised 1.3% bump. Immediately, the media went to blaming Hurricane Sandy for the impact. There are two problems with this excuse. First, Hurricane Sandy didn't hit the East Coast until October 29th after the majority of retail sales data was already collected; and secondly, it is more likely that Sandy actually boosted retail sales in the Northeast as individuals stocked up on supplies, and made preparations, prior to impact. The majority of the impact from Sandy will come in November.
However, even if we go with "Sandy impacted retail sales" argument - the Hurricane excuse doesn't really justify that the gross gain in retail sales nationwide over the last year was only $20.42 billion (not seasonally adjusted). Of the $20.42 billion in sales the major category percentage contribution is shown in the table:
Importantly, over the past year the bulk of retail sales have come from Motor Vehicle sales as sub-prime auto loans have made a vast resurgence and nearly as much simply went into the gas tank. Non-store retailers also comprised a large chunk of consumer dollars as more shoppers gravitated toward the internet leaving companies like Best Buy (BBY) gasping for air.
However, while consumers did spend money over the past 12 months, it has been a slowing rate of growth since June of 2011. This decline in the annual growth rate of sales is troubling.
As we stated last time:
"For the average American the impact of rising inflationary pressures due to higher food, energy and gasoline costs are being exacerbated by stagnant or declining incomes. The shortfall between incomes and the family budget has to be filled in with credit. The problem with that, of course, is that if incomes don't eventually start to pick up the default risk of extended credit increases.
The month over month data, especially when seasonal adjustment factors are included, can skew the data in the very short term. However, the economy, and the underlying earnings of the companies within the economy, is impacted more by the quarterly and annualized changes in the data. It is from those longer term views that hiring, expansion and production decisions are being made. Unfortunately, the trends of the data from manufacturing, production and sales do not bode well for the coming quarters ahead."
The chart below shows the annual percentage change between average hourly earnings and retail sales.
The impact of rising food and energy costs requires consumers to pay MORE for the SAME amount purchased. While increases in price, such as gasoline at the pump, shows up in retail sales reports as an increase in sales - it is only an increase in the dollar value of product sold and not necessarily in the quantity. For the average consumer this is what "inflation" looks like as wages decline and costs increase. For businesses that make products - it is the QUANTITY sold that matters. When there is no relative increase in demand in units sold - there is no incentive to increase employment or production.
The rate of change in retail sales is also a critical component in monitoring current state of the economy. Recently, we have seen weakness in industrial production and real incomes which have given us concerns about the strength and sustainability of economic growth. With sales now coming under pressure it is highly likely that we will see weakness in future employment. As my friend Doug Short wrote recently:
"As of the latest data, the growth is excruciatingly weak, and some might see some early signs of rolling over. Industrial Production and Real Income are off their 2012 highs, and Nonfarm Employment growth has been frustratingly slow. Real Retail Sales, the most volatile of the four, is the only one exhibiting strong growth over the past three months. But in the last few months we've seen a bit of disconnect between personal income and retail sales. That is not a sustainable decoupling.
History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators."
The important point is that with incomes under pressure, food and energy costs rising, and businesses being impacted by a recession in Europe combined with an inability to pass along cost increases to consumers - the economy is set to continue grinding along at a very sub-par growth rate. For investors - corporate earnings are being impacted as demand slows, rising input costs cannot be passed along and cost-cutting measures have primarily been exhausted. This leads to concerns about the validity of exhuberant forward earnings expectations and current market valuations.
The next two months will tell us much about the state of the real consumer as we analyze the holiday sales trends. With personal savings rates already on the decline - the percentage of total retail sales that fall onto the family credit card will be of particular interest. With consumer debt now back at record levels, as incomes struggle, one has to wonder just how long it will be before the next shoe drops?