by Lee Adler, Wall Street Examiner
The headlines and mainstream media stories on retail sales were hysterical and misleading as usual, thanks again to screwy, fictitious seasonally adjusted data. “Retail Sales in U.S. Dropped in March by Most in Nine Months!” blared the Bloomberg headline. In fact, that’s not only misleading, in reality it’s false. Retail sales not only gained last month, the gain was pretty close to the average for any March of the last 10 years. And it was way better than January and February when sales were considerably worse than average. So it was not worse than any month in the last nine months. Only the fictitious seasonally adjusted number declined. That number is not real. It misleads everybody who isn’t paying attention to the actual data, which is everybody but you, me, and a few others reading this post.
According to the Commerce Department’s March Advance Retail Sales Report, retail sales fell by 0.4% in March (month to month) but were up 2.8% annually. Those are seasonally adjusted estimates, which will be revised several times before they are finalized. Neither figure is adjusted for inflation. The median forecast of economists was for sales to be flat month to month. The economic consensus was too low, but the problem in this case appears to be partly with the seasonal adjustment, not just the fact that economic forecasting is quackery. This seems to happen virtually every month lately.
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.
The year to year change in real retail sales, ex gasoline sales and adjusted for inflation in March was a gain of 1.2%, which is weak, but it represented a rebound from February which had shown a decline of 0.5%. February 2012 had an unusually strong gain that was well beyond typical norms for the month, so that the year to year comparison February was much tougher than it would normally have been. Excluding the February drop, for the past year, the year to year gains have ranged from +0.9% to +5.5%. March was at the low end of that range, but it wasn’t below the range of the past 9 months or year.
On a month to month basis March is always an up month. This year, the monthly gain was 13%. That was better than March 2012 at +10.6%, and just slightly less than the 13.6% gain in 2011. The average change for the 10 year period from 2003 to 2012 was an increase of 12.6%. This year was consistent with the 10 year average for the month. The hysteria prompted by the headline numbers is misplaced. It wasn’t a bad month at all. In fact, it was better than average. So much for all the negativity.
Rising gas prices are a de facto tax on consumers that can cause reduced consumption of other goods and services since demand for gasoline is relatively inelastic. A rise in gas prices cuts consumers’ ability to spend more on other things. Conversely, a fall in gas prices is like a tax cut that puts a little cash back in consumers’ pockets. Gasoline prices fell about 14 cents a gallon through March according to the US Energy Information Administration. So theoretically this factor should have boosted retail sales in March.
Consumers were hit with increased Federal payroll and income taxes in January. That probably helped to depress sales over the past three months. Given that, the March performance showing a gain consistent with the average of the past 10 years suggests that consumers may be bouncing back a bit, rather than being more stressed as the mainstream media pundits are suggesting today. Real time withholding tax data suggested that there were very strong income gains for the first 3 months of the year as more people found jobs.
The Fed’s QE3 and 4 and the Bank of Japan’s new QE campaign continue to risk stimulating rising gasoline prices, but so far, the central banks have either been incredibly lucky, or incredibly skillful at jawboning speculators away from crude oil and other commodities purchases. The Fed has been jawboning speculators away from commodity speculation by threatening an early end to QE in speeches and FOMC meeting minutes. Eventually if it does not act on those threats, the “boy who cried wolf” syndrome will set in. Traders will then drive oil prices higher. That would crimp retail sales and defeat one of the Fed’s supposed purposes for QE. But we don’t know when “eventually” will be. For now, the band plays on.
The real rate of growth in the retail sales ex gas was between 3% and 7% in 2011, falling to 1% to 5% in 2012, and still in that range this year, excluding the anomalous February reading. US population is growing at slightly less than 1%. Retail sales real growth rate of several times that is pretty amazing. However, the growth rate has trended down even as the Fed has engaged in more money printing. QE simply is not working to boost employment or consumer demand. It is enriching a few speculators and bankers, who are already unimaginably rich, but it is doing nothing to boost economic activity.
The Fed has resorted to that money printing in an effort to spur job growth. It has managed to drive money supply growth to an annual growth rate in excess of 7% that hasn’t translated into economic growth. Some of that money is filtering into financial assets, fomenting a stock market bubble. Most of the money the Fed has created is just sitting idle in bank accounts, a growing inflationary powder keg that could ignite at any time if the momentum of the economy heats up. Conversely, if the economy continues to lag, the clinically insane Fed doves who control the FOMC will only increase their calls for more QE as they adamantly refuse to face the reality that their program isn’t working, and can’t work because the money remains bottled up in financial pools and conduits, never reaching the producing economy.
Past rounds of QE suggest that this one will eventually 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. But for now, the decline in input costs reflected in weaker commodity prices has taken the pressure off temporarily.
As for how all this impacts stock prices, this indicator had a long lead time versus the 2007 stock market top. The annual growth rate of real retail sales ex-gas was in a negative divergence versus stock prices for 2 years before stocks topped out. The growth rate went briefly negative a couple of times in the year before stocks topped out. In the current cycle, February was the first month in which the year to year change went negative. If a pattern similar to 2005-07 were to unfold in this bull market, the top of the current market may be a year or two away.
The real driver of this market is the Fed, and the real issue is how long it will take the forces of inflation to slow the economy and force the Fed to end the money printing. The gradual decline in the real growth rate of retail sales ex-gas is merely an early warning.
Next week I will update the bleak report on real retail sales per capita, which has shown individual consumers falling ever further behind in this recovery. See As Fed Blows Bubbles, US Consumers Fall Further Behind, Where’s the Trickle, Ben?
This report is excerpted from the permanent charts page on Real Retail Sales.
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