Do Weak Retail Sales Indicate a Problem with the Economy?
Do weak retail sales indicate a problem with the economy?
They’re certainly a problem for retailers. Weak overall sales, plus competition from online retailers, are among trends causing a large number of retailers to file for bankruptcy. But does the recent weakness in retail sales foreshadow a problem with economic growth?
The latest retail sales report that came out this week was mixed. The headline number was above expectations with a 0.6% increase for the month. But after excluding autos, it only met expectations. And after excluding both autos and gasoline, sales were below expectations and increased only 0.1% for the month.
Retail sales data rarely are smooth. Households tend to spend a lot extra one month, and then settle down for a month or more. On a short-term basis, the sales data are what economists call “noisy.” You have to look at trends over six months or more to get a handle on what’s happening with consumers.
It also is a good idea to look at real retail sales. Those are retail sales that are adjusted for inflation. For example, gasoline prices are very volatile. Some months nominal retail sales rise or fall by a significant amount because gasoline prices changed. People bought the same volume of gasoline, but the dollar amount changed with the price of gasoline. Consumers tend not to adjust their spending based on a month’s change in gasoline prices but will change overall spending if gasoline prices trend significantly higher or lower over time.
From that perspective, real retail sales growth so far in 2018 is a bit below 2017 levels but in line with the average since the financial crisis ended. Some months are above the average and some are below, but over time the growth has been within a range.
The traditional supports for retail spending growth remain in place. The labor market, of course, is strong. Unemployment is very low, as are new unemployment claims. Employers report having difficulty finding enough qualified employees. Wage growth is modest by historic standards but is gradually rising.
Consumer confidence surveys continue to report high levels of optimism about both current conditions and the next six months. That usually leads to higher retail sales a few months in the future.
A look at retail sales by category also is more positive than the headline number. Over 12 months, sales increases are good in most categories and exceptional in some. In addition, weather might be the cause of recent weakness in some categories, such as building materials and sporting goods.
I consider real retail sales growth to be one of the better recession early warning indicators. While some worry about recent retail sales data, it looks healthy to me. The economy might be slowing from the higher growth rate of the second half of 2017, but I don’t see signs of negative growth.
Note: I prepared this week’s Bob’s Journal a day early because of travel plans. The economic and market data are through the close of business on Tuesday, April 17.
The Data
We could be seeing the first negative effects of the recent trade rhetoric and tariff actions. The Empire State Manufacturing Survey dropped to 15.8 from 22.5. Manufacturing still is growing, though at a lower rate. The big change was a sharp drop in expectations for the next six months.
The Housing Market Index from NAHB dropped to 69 from 70, its lowest reading since last November. The report still is positive, and analysts attribute much of the weakness to weather.
Housing Starts also were a mixed picture. The headline number showed a solid increase in starts. But that was led by multi-family housing with a 14.4% increase for the month. Single-family home starts declined 3.7%, and single-family permits declined 5.5%.
Industrial Production is picking up. Production increased 0.5% for the month, following last month’s 1.0% increase. But mining and utilities were a big part of the increase. The manufacturing component increased only 0.1%. Yet, within that component, the important business equipment production now is up 4.4% over 12 months.
Consumer Sentiment, as measured by the University of Michigan, settled back to 97.8 from 101.4. This big decline from last month’s 14-year high is much more than expected. But the number still is in the range the survey has been recording most of the last year. The big decline in the survey was in the current conditions component.
The Markets
The S&P 500 gained 1.90% for the week ended with Tuesday’s close. The Dow Jones Industrial Average rose 1.55%. The Russell 2000 returned 2.40%. The All-Country World Index increased 1.11%, while emerging market equities declined 0.67%.
Long-term treasuries increased 0.16% for the week. Investment-grade bonds declined 0.15%. Treasury Inflation-Protected Securities (TIPS) returned 0.34%. High-yield bonds rose 0.65%.
On the currency front, the dollar fell 0.21%.
Energy-based commodities rose 0.65% for the week, while broader-based commodities returned 0.16%.
In the precious metals arena, gold rose 0.47%.
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