Retail Sales
The Census Bureau had a press release this morning announcing that nominal retail sales fell -0.6% in February, the third consecutive fall.
Wall Street economists,analysts, strategists and managers have been watching these weak retail sales reports and speculating on why the drop in oil prices has not lead to the boost in consumer spending that virtually everyone expected.
The problem is that the nominal data can be misleading. Few know that the Bureau of Economic Analysis (BEA) as part of its GDP calculation also creates an unpublished series on retail sales that will be available later this month. The BEA also estimates deflators for the various components of retail sales and an estimate of monthly real retail sales by category.
The BEA data is much better than the series of nominal sales deflated by the CPI available in FRED ( the St. Louis Fed. public data base).
Over the previous three months –November, December and January –both Census and BEA estimated that nominal retail sales fell 1.3%.
But the BEA data also showed that over these three months the retail deflator fell -3.34%. Consequently, the -1.3% drop in nominal sales
is actually a 2.15%increase in real retail sales, or almost 9% at an annual rate.
I expect when the BEA deflator becomes available the – 0.6% drop in February nominal sales will actually be a real increase.
The sharp decline in the retail deflator is not just oil. Almost every segment of retail sales except food stores and restaurants is showing a sharp drop in prices. In 2013 and 2014 the change in the retail deflator bounced around zero. But as of January the year over year change in retail sales prices fell to -3.3%. While the Fed is worrying about inflation and the Cassandras who have seen inflation right around the corner for years continue to forecast a massive inflationary surge, the data implies that deflation may be much more likely.
Be careful. A bunch of that was weather related to auto sales. I suspect a far better nominal number in March.
Spencer:
That should play out well, decreased retail sales with increased Fed Rates.
The monthly change in the deflator for autos has been:
oct…..-0.23
nov…..-0.93
dec…. -0.97
jan….. -1.97
The retail sales data reported a 2.55% drop in Feb auto & parts sales
the same as in the SAAR data on light vehicles from Autodata.
That implies a zero change in the auto deflator.
Sorry, but that isn’t decreased retail sales. That is real increased retail sales. December/January were impressive advances. Probably about 4% real pce. February will weaken that down to 3%. So about 4% real pce growth for 2 quarters.
John:
Was responding to this:
“But as of January the year over year change in retail sales prices fell to -3.3%. While the Fed is worrying about inflation and the Cassandras who have seen inflation right around the corner for years continue to forecast a massive inflationary surge, the data implies that deflation may be much more likely.”
playing around with that, i estimated January PCE up at a 1.8% rate vis a vis the 4th quarter…i also estimated impact of January trade, construction spending, and factory inventories on Q1 GDP, although my margin of error is probably larger than Census on housing data..
the three business types seeing the largest declines in February retail, building materials and garden supply stores, which saw sales drop 2.3%, and general merchandise and electronic and appliance stores, where sales fell 1.2%, may well have been effected by the colder and snowy normal February in a large portion of the eastern US…and while such weather may impact retail, consumer outlays may be directed into other sectors, such as utilities and snow removal…
with a 0.24% decline in sales ex auto and gasoline, we can’t guess if other real retail sales have fallen or not until the February consumer price index is released; it may be that even though consumers spent less, they might have bought more goods…and if they bought more goods, that means more goods were produced, which would add to GDP…similarly, we can’t tell if the lower sales are hurting the retailers until we get the trade margins data from the February producer price index…for instance, if real sales fell 0.2% but margins rose 0.5%, then retailers did 0.3% better in February than in January…
just to update my comment on the release of the producer price index for February, which saw the headline price index fall 0.5%…the producer price index for final demand trade services, which is the measure of margins for retailers and wholesalers, was down 1.5% in February, so most retailers did take a hit…a breakdown by business type is here:
http://www.bls.gov/news.release/ppi.t04.htm
a bit more than half way down, under “Final demand trade services”
isn’t it the case that “lower sales” meaning “lower prices” even if “more products” is a sign of deflation which is, i understand, a bad sign for the economy.
a seller can sell more goods by lowering his prices, but he is not likely to raise wages, or buy more goods to sell at decreasing prices.
Real retail sales per employee hour in retail is up 4% on a year/year basis
so that will offset a lot of price weakness or higher labor costs.
Falling wholesale prices in the retail is actually a positive for retail earnings.Typically, retailers work with a 100% markup — if the wholesale price is $5 they will price it at $10.– to cover overhead costs. But if they can replace the item at $4 because of falling prices they have made more money than they thought. In the inflation of the 1970s retailers had just the opposite problem. If it cost them $6 to replace the $5 item they had made less profits than they thought.. That is one of the reasons retailers relative stock performance may be more sensitive to inflation than any other stock market industry.
coberly, i imagine that most analysts would consider falling prices a bad sign, but a lot of this has been the result of lower oil prices inputting into everything from drugs and chemicals to textiles and shipping costs…metals and farm commodity prices are down as well..the result is that most of our monthly reports, which are reported in dollars, are down, and most everyone who reports on them are having a cow…this effects not just retail, but inventories, the inventory to sales ratio, and also imports and exports…i’m just trying to figure out what’s going on without making a judgement as to whether it’s good or bad..
rjs
thanks. i wasn’t finding fault with you. just noting that falling prices was not generally a good sign.
i’m having a little trouble with “the price of oil” not being “deflation” when back in the seventies it was “inflation.” i kind of think i know the answer, but it’s not one i hear a lot.
I agree, falling oil is deflation. If nothing else it feeds into inflation expectations that in wage setting and back into the price of other goods.
The Fed and most economists that use the core CPI is not that falling oil prices should not count. Rather, they use core because it is a better forecaster of future inflation and it is less volatile that the full CPI — for over three years every monthly core CPI reading has been between 0.1% and 0.3%. But after oil and/or food prices have been rising for some time you need to incorporate them into your inflation forecast and how you think it will impact the rest of the economy.
That is why I did the blog on retail prices — it is that the nominal data is misleading people about the strength of the economy and because of deflation the economy is actually stronger in the short runthan people generally expect.
thanks Spencer.
little by little i learn.