US Economy I: Business Sales Strong. March retail sales data were released yesterday. So were data on total business sales of goods through February. The latest retail sales data are included in an advance report, while the business sales data are lagged because of the longer delay in the availability of data for manufacturing shipments and wholesalers. Most economists, and all of the financial media, focus on retail sales and ignore the business sales release.
Debbie and I tend to focus more on the business sales data even though it is a bit stale. That’s because the y/y growth rate in business sales is a good indicator of the comparable growth in S&P 500 revenues, which is quarterly with even a longer lag.
Consider the following:
(1) Total. Business sales is up 5.8% y/y through February (Fig. 1). This growth rate is up from a recent trough of -4.2% during August 2015. It has been highly correlated with the yearly growth rate in S&P 500 aggregate revenues since the start of the S&P 500 revenues data in 1993. The growth rate in business sales has been tracking the growth rate in the S&P 500 series remarkably well since 2008. This is remarkable because business sales includes only goods, while the S&P 500 series includes goods and services.
(2) Excluding energy. The plunge in oil prices during the second half of 2014 through the end of 2015 also weighed heavily on nonenergy business sales, accounting for most of the recent cycle in nonpetroleum sales. Excluding petroleum, business sales growth dropped from around 4.0% during 2014 to zero during 2015 and 2016 (Fig. 2). The plunge in oil prices, along with the widespread weakness in commodity prices during the second half of 2014 through 2015, depressed global economic growth. However, that growth rebounded in late 2016 through 2017, as evidenced by the uptrend in the growth of both nonpetroleum business sales and S&P 500 aggregate revenues excluding the revenues of the S&P 500 Energy sector.
(3) Global growth. Our Global Growth Barometer (GGB) is simply the average of the CRB raw industrials spot price index and the price of a barrel of Brent crude oil (Fig. 3 and Fig. 4). It remains on the solid uptrend that began in early 2016.
(4) Peak growth. While the GGB continues to signal solid global economic growth, odds are that the growth rates in S&P 500 revenues both with and without Energy peaked during Q4-2016 at 8.6% and 7.1%, respectively. Industry analysts may already be starting to curb their enthusiasm about the outlook for revenues this year and next year (Fig. 5 and Fig. 6). Their consensus expectations for both rose sharply since late last year through mid-March, but have flattened since then through early April. Nevertheless, they are currently predicting solid gains in S&P 500 revenues growth with growth of 7.0% and 4.5% this year and next year.
(5) Elevated PMIs. By the way, Debbie and I have previously observed that the cycles in both the US M-PMI and NM-PMI track S&P 500 revenues per share relatively well (Fig. 7 and Fig. 8). The M-PMI edged down in March to 59.3 from 60.8 in February, while the NM-PMI ticked down to 58.8 from 59.5. Both remain relatively high, and upbeat for revenues growth.
US Economy II: Retail Sales Weak. Weighing on business sales during the first quarter have been weak retail sales numbers. Inflation-adjusted retail sales fell 3.1% (saar) during Q1-2018 vs Q4-2017 (Fig. 9). Debbie uses the CPI for goods to deflate the retail sales data. Core retail sales (excluding consumer spending categories that are treated separately in GDP) fell 2.8%. Confirming the slowdown is the flattening of revolving consumer credit outstanding (Fig. 10 and Fig. 11).
That’s quite surprising given the strength in payroll employment, which raked up average monthly gains of 202,000 per month during the first quarter. Hourly wages also rose, pushing our Earned Income Proxy to a new record high in March (Fig. 12).
The drop in real retail sales should be offset by an increase in consumption expenditures on services. Nevertheless, total personal consumption was weak during the first quarter. Indeed, the Atlanta Fed’s GDPNow model now estimates that real GDP rose only 1.9% during the quarter, down from 2.0% on April 10. That was because “first-quarter real personal consumption expenditures growth declined from 1.1 percent to 0.9 percent after this morning's retail sales release from the U.S. Census Bureau.” There are a few possible explanations:
(1) Seasonal aberration. There is a well-known seasonal-adjustment aberration in the real GDP’s data showing that since 2010, economic growth has been weaker than growth over the remaining four quarters of the years since then (Fig. 13). It seems to be driven by the personal consumption expenditures component of real GDP (Fig. 14).
(2) Tax cuts and hikes. The weakness in retail sales during the first three months of the year is especially odd given that the Tax Cut and Jobs Act enacted on December 22 of last year boosted the take-home pay of lots of taxpayers at the start of the year. On the other hand, many taxpayers lost their deductions for state and local taxes exceeding $10,000. There is also lots of uncertainty about how sole proprietorships will be taxed.
(3) Revisions. Finally, the retail sales data might be revised up. The data are prone to revisions. Retail sales revisions are usually worth mentioning, but this time around sales for January and February were unchanged at -0.1%.
US Economy III: Online Retail Sales Strong. Meanwhile, online retailers’ share of GAFO rose to a record 31.0% during February (Fig. 15). It has more than doubled from 15.0% during February 2006. (GAFO is general merchandise, apparel and accessories, furniture, and other sales. It includes sales of retailers that specialize in department-store types of merchandise such as furniture & home furnishings, electronics & appliances, clothing & accessories, sporting goods, hobby, book, and music, general merchandise, office supply, stationery, and gift stores.)
Online retailers continue to take share away from department stores, which are down to 12.1% of GAFO from 37.2% during March 1992, near the start of the data. Online retailers have also been slowly chipping away at the share of warehouse clubs and super stores, which are down to 25.2% from a record high of 27.2% during January 2014.
On average, households spent $15,500 (saar) at the end of last year on in-store and online GAFO (Fig. 16). In-store GAFO was $10,700 per household, just about unchanged since 2008. Online GAFO was a record $4,800 per household at the end of last year, up 144% since late 2008 (Fig. 17).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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