Why is the Fed Panicking? Real Retail Sales are Strong

Real Retail Sales are Up 3.5% Annually

by Lee Adler, The Wall Street Examiner

Retail Sales and Real Retail Sales ex Gasoline

Updated September 14, 2012

Retail Sales rose by 0.9% from July to August and 4.7% annually, according to the Commerce Department’s Advance Retail Sales Report released today. Those are seasonally adjusted idealized estimates. Neither figure is adjusted for inflation. The consensus estimates were for a gain of 0.8%. Their guess was pretty good this month.

Retail Sales and Real Retail Sales Ex Gasoline - Click to enlargeRetail Sales and Real Retail Sales Ex Gasoline – Click to enlarge

The year to year gain in real retail sales, ex gasoline prices, and adjusted for inflation in August was 3.5%, which is up from 1.9% in July, but still well below the headline number. It is near the middle of the range of annual growth rates since March 2010 when the initial rebound from the worst part of the depression leveled off. There’s no sign of a change of trend, and no sign of any weakness.

Note: When analyzing retail sales, I’m interested in the actual volume of sales, not the inflation skewed dollar total. To get to the kernel of the matter, I look at the real, not seasonally finagled retail sales, adjusted for top line CPI inflation (not core which normally understates the actual). Then I back out gasoline sales, which are a substantial portion of total retail sales. Gasoline sales distort total retail sales higher when gas prices are rising, when they actually act like a tax on disposable income and reduce non-gasoline sales. On the other hand, when gas prices fall, the top line total retail sales figure will understate any gains in the volume of sales. Gasoline sales typically account for around 12% of total retail sales. By subtracting gas sales and adjusting for inflation, the resulting number represents the actual volume of retail sales.

This analysis uses not seasonally adjusted (NSA) data due to the inaccuracy and potentially misleading nature of seasonally adjusted data. In this context, historically, August is usually an up month. This year real sales ex gas rose by 4.2% from July to August. That was stronger than the corresponding period of last year (+2.6%%) and 2010 (+0.2%). It was also stronger than the 2002-2011 July average of +1.9%.

This gain is a rebound from two months weaker real sales. The rebound in August, when gas prices were hitting consumers hard, is impressive. Rising gas prices are a de facto tax on consumers that cause reduced consumption of other goods and services, since demand for gasoline is relatively inelastic. This is another example of data that indicates that the Fed is underestimating the strength of the economy. Yesterday it panicked in announcing an open ended quantitative easing.

The initial advance estimate is based on a small survey sample and is subject to revisions that could make the comparisons slightly more or less favorable when the final estimates are in but the revisions are normally not material.

In the big picture, this recovery is weak relative to the past when “growth” was driven by seemingly endless expansion of debt. In a more balanced economy not driven by growing debt, growth of 2-2.5% in a nation where population is growing at slightly less than 1%, is probably the best the can be expected. A real growth rate of 3.5% in retail sales is not soft in that context.

Likewise, today’s unemployment rates are probably normal, and not cyclically elevated as the Fed seems to think. The Fed thinks the ultra low bubble unemployment rates of 5.5 to 6% are normal. The misguided desire to get back to bubble unemployment rates is what is driving their panic. Their move yesterday was unjustified, and will result in the unintended consequences of a cost squeeze on business profits and inflation pressure on middle income consumers that could choke off the recovery in a few months. The top 10% will have to massively increase their spending to offset that.

Real Retail Sales Ex Gasoline Per Capita

Updated September 14, 2012 (July data).

Real Retail Sales Ex Gasoline Per Capita - Click to enlargeReal Retail Sales Ex Gasoline Per Capita – Click to enlarge

The mob is only concerned with how top line retail sales did this month. They’re really looking at inflation, driven by the spending of the top 10%, not growth in the volume of sales, and not broader growth in real demand. The majority are buying less, not more. The idea of the “resilient US consumer” is a myth. Only the top 10% is resilient. The other 90% is losing ground.

Real Retail Sales Ex Gasoline Per Capita fell in both June and July after their biggest year to year gain in 21 years in May (since when this data began). July saw a year to year gain of just 1.3%. That compared with 4.4% in May and 0.8% in June.

On a month to month basis, July was down by 1%. July is a swing month, with gains in some years and declines in others. The 10 year average for July 2002-2011 was a gain of 0.2%, but last year there was a drop of 1.5%. This July was a little weaker than average, but not as weak as last July. The year to year gain of 1.3% shows just how poorly most Americans are faring.

The current level of $639 per person in 1982 constant dollars is just 3.6% above the June 2009 level, when the depression was just coming off its worst level. From 1999 to 2007 this figure was flat, but never less than $710. The current figure is still 9% below that level. In other words, on average, people are spending at least 9% less than they were five, ten, and 13 years ago, showing clearly that, even though there has been some recovery since 2009, most Americans have lost purchasing power over the past decade.

This report is reproduced from the permanent page on retail sales, updated when new data is posted. Bookmark it for future reference.

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