Behind Positive Headline Retail Sales Show Weakened Consumers
By Rom Badilla, CFA
September 17, 2012
Retail sales increased in August suggesting that on the surface the consumer continues to spend fueling economic growth. However, when looking behind the numbers, consumer spending appears to be slowing down. The U.S. Department of Commerce released a report that Retail Sales which measures receipts at stores that sell merchandise and services to consumers, increased last month, matching market expectations. Retail Sales in August increased 0.9%, matching the median survey by economists and after a revised July increase of 0.6%. On a year over year basis, Retail Sales on a seasonally adjusted basis rose by 4.7%.
While the headline number shows improvement which suggests a healthy consumer, the details behind show reason for concern. Specifically, the headline number was fueled by a sharp rise in gasoline stations, following a decline in the previous months. Sales at gasoline stations increased by 5.5% in August after edging slightly higher by 0.4% in the previous month and falling 3.5% in June. The increased sales at the gas pump is a reflection of the rebound in energy prices which is reflected in the recent CPI data release as opposed to an increase in demand.
As a result, Retail Sales excluding autos and gas barely increased last month. For August, the adjusted sales index rose by only 0.1% after a 0.8% jump in July. The latest month’s print disappointed the market since the median forecast by economists was at 0.4%.
The implication for this development is that the consumer is not as healthy as it appears which could have an effect on the economy if the data does not turn around. When we breakdown the components of economic growth (Consumer spending, Business Investment, Government Expenditures, and the Trade Balance between Imports and Exports), there are signs that the majority are down. The lone exception falls in the hands of the consumer which accounts for about two-thirds of economic growth. Retail sales while volatile, make up about half of consumer spending so it is an excellent proxy for U.S. economic growth.
Hence if rising energy prices rise enough to cripple people’s spending habits, then consumer spending could join the other weakening components which in turn could result in even slower, perhaps negative, economic growth.
Joseph LaVorgna, the Chief Economist over at Deutsche Bank, suggested that this piece of data is a concern for those betting that the economy will continue to grow and bears watching. In his latest, “U.S. Data Flash” he provided the following commentary:
The fact that retail sales ex‐gasoline continued to increase in August suggests that the impact of the rise in gasoline prices is not yet being fully felt by consumers; however, the trend bears watching because gas prices do have a significant impact on consumption patterns—albeit with a lag. The fact that most of the Q2 retail gas price decline has since reversed poses a significant headwind for consumption at a time of year when gas prices typically decline.