Retail Sales: First Decline In 4 Months

by: Doug Short

The Advance Retail Sales Report released this morning shows that sales in October came in at -0.3% month-over-month with an upward revision to 1.3% for September (previously 1.1%), but a downward revision to 1.0% for August (previously 1.2%). Today's number is below the consensus forecast of -0.2%. The year-over-year change is 3.8%. The latest report is the first decline in four months.

Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population.

The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes.

The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact. After the cliff-dive of the Great Recession, the recovery in retail sales has taken us (in nominal terms) 8.6% above the November 2007 pre-recession peak.

Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.

The green trendline is a regression through the entire data series. The latest sales figure is 5.4% below the green line end point.

The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.2% below the blue line end point.

We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy.

The "Real" Retail Story: The Consumer Economy Remains at a Recessionary Level

How much insight into the U.S. economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 150.8% since the beginning of this series. Adjust for population growth and the cumulative number drops to 103.3%. And when we adjust for both population growth and inflation, retail sales are up only 21.5% over the past two decades.

Let's continue in the same vein. The charts below give us a rather different view of the U.S. retail economy and the long-term behavior of the consumer. The sales numbers are adjusted for population growth and inflation. For the population data, I've used the Bureau of Economic Analysis mid-month series available from the St. Louis FRED with a linear extrapolation for the latest month. Inflation is based on the latest Consumer Price Index. I've used the seasonally adjusted CPI as a best match for the seasonally adjusted retail sales data. October retail sales adjusted accordingly also came in at -0.4% month-over-month compared to the -0.3% unadjusted MoM, and rose only 1.0% year-over-year, much lower than the 3.8% YoY reported in the popular financial press.

Consider: During the past 20 years, the U.S. population has grown about 23%, while the dollar has lost about 40% of its purchasing power to inflation. When we adjust accordingly, the rebound in retail sales from the bottom in April 2009 merely gets us back to the per capita spending we first achieved in December 1999, over 12 years ago.

Retail sales have been recovering since the trough in 2009. But the "real" consumer economy, adjusted for population growth is still in recession territory — 6.4% below its all-time high in January 2006.

As I mentioned at the outset, retail sales were up strong in recent months. However, gasoline prices can act as a tax on economic growth: The more we spend on gasoline, the less we have to spend on other goods. With this concept in mind, let's look at the real, population-adjusted retail sales, excluding gasoline.

By this analysis, adjusted retail sales ex gasoline was down 0.6% in October from the previous month and up 2.3% year-over-year. However, it's down 9.0% from its all-time high in June 2005.

The Great Recession of the Financial Crisis is behind us, and retail sales over in recent months have shown an encouraging improvement, even when adjusted for inflation and population growth, although the October numbers show a reversal in the trend. To some extent, this may be attributable to Hurricane Sandy's effect on the final days of the month.

But a close analysis of the data suggests that the recovery has been frustratingly slow. Let's hope that the post-Sandy months ahead will return us to positive trend we saw in July through September. But the more sobering reality is that, in "real" terms — adjusted for population growth and inflation — consumer sales remain at the level we saw about seven months into the last recession.