Digging Behind The February Retail Sales Report
Sometimes you just have to scratch your head and go "hmm." That was my first reaction to the most recent release of the retail sales numbers for February which came in stronger than expected in both the headline print (+1.1%, on expectations of a +0.5% rise), the Ex-Autos (+1.0%, Exp. 0.5%), and the Ex-autos and gas (0.4%, Exp. 0.2%). While this is certainly optimistic news that the consumer is "out there spending," which is crucially important for an economy that is 70% based on consumption, it doesn't really tell us much about where consumers are actually spending money or the trend of data overall.
I wrote an article on employment recently entitled "Seasonal Adjustments Are B.S." wherein I discussed the problems, and subsequent obfuscation, with the use of seasonal adjustments to smooth out otherwise volatile monthly data. I showed in that article that by using a simple 12-month average of the non-seasonally adjusted data we can get a much better picture of the overall trend of the data as it relates to the economy.
"In the end what we all really want to know is the 'truth.' Is the current overall employment picture improving - the unadjusted data says "yes." However, what is happening with employment across the country hardly shows a resurgence of underlying economic strength. It is time to get rid of seasonal adjustments and use a simpler analytical process instead. After all, if you are like me, we can handle the 'truth' and are likely to make better decisions because of it."
This is the same problem that arose with the release of the February retail sales data. While the headline seasonally adjusted number showed a surge in retail sales in February - the actual data showed a decline. This is shown in the chart below which shows the preliminary retail sales data for February on both a seasonally and non-seasonally adjusted basis.
As you can see there was a sharp drop in retail sales in January which continued to slide into February. This is the first sequential decline in the data in the last three years.
The problem, as stated above, is that the monthly non-seasonally adjusted is extremely "noisy" and therefore has to be "smoothed" in order to provide a more intelligible trend. As we stated in the above referenced report on employment:
"Therefore, by using a simple 12-month average of the non-seasonally adjusted employment data, excluding all seasonal or birth/death adjustments, we can achieve a clearer picture about the real state of employment and the economy. Of course, the immediate question is how does it compare to the data that is released to the BLS?"
The same analysis can be applied to the retail sales data. The chart below shows the non-seasonally adjusted (NSA), seasonally adjusted (SA) and the 12-month moving average of the NSA data.
As you can see, the 12-month moving average is a much cleaner, simpler and more easily understood measure of reporting the data. However, even this bit of analysis tells us very little about the real strength, or weakness, of the consumer. What is more important to understand is where consumers are, or are not, spending money. In an economy that is 70% driven by consumer spending the importance of this report, which is part of the total personal consumption expenditures of GDP, should not be dismissed lightly.
Consumers only have a finite amount of money to spend from one month to the next. Therefore, it is important to understand where that money is being spent in order to understand the impact to overall economic growth. The problem with the latest retail sales data is that it shows a consumer that is beginning to struggle. We stated previously that:
"Not surprisingly, real personal consumption tracks real incomes, and with the sharp drop in income in January, higher payroll taxes, and a sharp rise in gasoline prices, it is very likely that real personal consumption will show a larger than expected decline in February."
This is exactly what happened. When digging into the retail sales numbers we find that sales of gasoline jumped by 5% and food and beverages rose by 0.8%. These two items made up roughly half of the entire increase in February's retail sales. This is critical because individuals weren't buying more gallons of gasoline, they were paying more for the same amount. The same goes with food and beverages. This means there is less money available for other discretionary, leisure and luxury items. Not surprisingly, there were declines in precisely those areas including furniture, electronics and appliances, sporting goods and music stores.
However, looking at month to month changes in the data tells us very little about the overall trends. It is the trend of the data that is important in determining the potential impact to economic growth in the future. The next chart utilizes the smoothed NSA retail sales data to look at the annual change in retail sales.
There are two important takeaways from this data. First, retail sales have clearly been weakening which is reflective of the slower economic growth rate currently. Secondly, although there is only limited data going back to 1992, whenever the annual percentage change in retail sales has declined below 4% the economy has been heading towards a recession. At the current rate of decline there is a high probability that this 4% warning line will be violated in the next few months.
While retail sales are very important to the overall economy the current preliminary data, like employment, is VERY subject to future revisions. This makes analyzing the current data almost useless in predicting future economic growth or weakness. My friend Doug Short just recently picked up on this same issue in his recent post stating:
"Here is a visualization of the change from the first to third estimates from January 2007 through December 2012, the most recent month for which we have data points."
"Are the sizes of these numbers significant? Consider: Over the same timeframe, the month-over-month absolute mean change of the latest revised retail sales series is 0.83%. A more dramatic way of thinking about this is as follows: Since 2007 the absolute second revision divided by the absolute mean advance estimate is a whopping 46%.
The message is clear: Don't take the initial retail sales data too seriously, which is the same message we saw for last Friday's jobs data."
While mainstream pundits fell all over themselves about the "return of the consumer" - they should have been shocked by the impact of the rising inflationary pressures on the consumer. Of course, the BLS will revise much of those away in the future CPI reports particularly since food and gasoline is excluded from the core reading. Despite commentary to the contrary the decline in incomes from higher taxes, stagnant wage growth and rising costs of living is impacting the average family's ability to maintain their current standard of living. Of course, this is also why the personal savings rate has plunged to below 3%, consumer debt levels, ex-mortgage debt, are on the rise and retirement age individuals are still actively employed. This isn't the backdrop that leads to stronger, organic, economic growth in the future.