Real Retail Sales Under Pressure
Retail sales slowed sharply in April rising only 0.1 percent, following a 0.7 percent increase in March (originally up 0.8 percent). No real surprise here but it is interesting to see retailers beginning to show signs of strain in recent earnings' reports. The concern continues to be the pressure on consumers from rising energy and food prices without commensurate increases in wages. While the current trend of consumption is encouraging it is where the consumption is being derived that is concerning.
As we reported yesterday we see very disturbing trends in disability claims, school loans and consumer credit rising while wages remain stagnant or decline along with personal saving rates. As a side note retail sales only make up about 40% of total personal consumption expenditures (which plugs into GDP) which has also showed signs of consumer strain. The chart above shows the year-over-year change in real retail sales. The peak in retail sales was achieved in early 2011 and has slowly been deteriorating since. This supports our view that government largess has reached its point of diminishing returns which is why we continue to see sub-par economic growth and employment constraints.
Motor vehicle sales lifted the broad number, gaining 0.5 percent in April after a 0.2 percent gain the month before. However, the question becomes if the cars are actually moving through the system to the end buyer or just stacking up on car lots. With dealer inventory hitting records, especially for GM, and subprime auto loans back in fashion you have to question the real strength of the sector. However, one highlight for automakers is that the average age of cars on the road is now reaching life expectancy limits. Therefore, the replacement cycle in auto's could keep the sector chugging along but do not get overly excited as the current rate of sales is still far below the normal levels seen at the beginning of this century.
Excluding motor vehicles, retail sales increased 0.1, following a 0.8 percent boost in March (originally up 0.8 percent). The rise in gasoline prices curtailed purchases which tugged down gasoline sales 0.3 percent, following a 1.0 percent jump in March. If we look at where individuals were spending money in the last month, outside filling up their gas tank, there were increases in nonstore retailers; furniture & home furnishings, sporting goods, hobby, book & music stores. Buying gadgets and music won out over buying clothes, building materials and garden supplies which showed weakness.
What is interesting, however, is which types of store individuals were shopping at. Sales of used merchandise have continued to soar as buyers seek the lowest cost alternative to fulfill there needs. Department store sales have continued to struggle as evidenced by this morning's release from Sak's luxury depart store chain which reported disappointing revenue for the first quarter.
As we have stated in the past the consumer is the key to the next recession. Consumption currently makes up more that 70% of GDP and the sustainability of that strength of spending is linked to the ability for individuals to maintain the struggle between real income and the requirements to maintain a standard of living. It is never wise to count the consumer out because as we have seen they can be very creative in coming up with sources of credit, leverage and income. However, even those sources have limits and the run up in student loan debt to support consumption is likely candidate for the next financial debacle in the not to distant future.