WHAT IT MEANS:
- INDICATOR: October Retail Sales and Producer Prices
- KEY DATA: Sales: +0.1%; Excluding Vehicles: +0.2%/ PPI (Goods): -0.4%; Excluding Food and Energy: -0.3%; Services: -0.3%
- IN A NUTSHELL: “Households appear to be shopping tentatively, but it may just be lower prices that are saving them lots of money.”
Retailers are singing the blues and the soft October retail sales report seems to support their plaintive songs. Yet the lowered dollar volume may not be an accurate measure of what is really happening.
First, there was a sharp decline in gasoline purchases, but that was the result of a drop in prices not unit sales. General merchandise demand was also off, but that too might be traced to falling consumer costs. The drop in vehicle sales, though, is one of those strange occurrences that we see once in a while.
Unit sales rose in October, so people didn’t stop kicking the tires. In other words, if we look past the dollar totals, we might find that consumers are shopping more and paying less. That would show up in the inflation-adjusted consumption numbers. The University of Michigan’s mid-month reading of consumer sentiment rose nicely, raising hopes that households will feel good about shopping for those all-important holiday presents.
The Fed may be hoping for a sign that inflation will accelerate, but it wasn’t in the October Producer Price Index. Prices fell once again and you have to look long and hard to final any major grouping that posted a positive number. There are over 50 special groupings reported and only three were up.
What was telling in the report was the decline in services costs. This had been the one component that had been holding up, at least a little, but not lately. Wholesale and retail margins are being squeezed, causing costs to decline.
One positive sign was that trucking margins improved, which may be indicating a stronger economy.
MARKETS AND FED POLICY IMPLICATIONS:
The retail sales report will be read as a warning that the economy is not strengthening.
I don’t agree.
Prices matter, so let’s wait until we see the inflation-adjusted consumption data, which includes services. Investors may focus on goods, but two-thirds of the consumer dollar goes to services.
But we also need to recognize that there may be something more fundamental going on here. After seven years of lean, people have learned they don’t need all those things they once thought they needed. There are very few “must haves” and a lot more “I can live without’s.”
That is seen in the savings rate, which since the end of the Great Recession has been running well above what we saw during the last expansion. Thus, not only is “shop ‘till you drop” out, but maybe so is “shop ‘till you’re tired,” which is what I had been hoping for.
Also, we tend to forget that when you buy a vehicle, you usually take out a loan or lease.
With vehicle sales soaring this year, a lot of people are paying back loans. That may be taking money from more traditional retail demand.
Finally, the weather is likely playing a role. This has been a very mild fall and with stores stocked with winter clothes, thoughts of Jack Frost nipping at our noses has not entered into the consumers thought pattern.
So, don’t fret the retail data, which is what the Fed members are likely thinking.
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