Whenever a key economic indicator shows weakness in the latest monthly update, the usual worries arise. No explanation required in the current environment and so today’s retail sales report for April will draw a fresh round of dark predictions from the usual suspects. And perhaps they’ll be right this time. But for now, it’s still premature to argue that the modest growth train has derailed, even if it looks that way by focusing on the latest data point.
Consumer spending increased a weak 0.1% in April, although that compares favorably to March’s 0.5% decline, the biggest monthly slide since last June. No one will mistake the latest numbers as anything other than a sign that retail consumption has turned sluggish again. But for those who are quick to jump on the listless number du jour as a sign of macro apocalypse, a bit of perspective may inspire a less-strident view.
Let’s start by considering retail sales ex-gasoline, a rough proxy for measuring appetite for what consumers are willing and able to buy vs. what they’re effectively forced to purchase for such things as driving to work. By that standard, retail spending climbed a healthy 0.7% in April, the most since last November.
Monthly numbers are noisy, however, and so it’s always wise to take the latest update with a grain of salt. For a clearer look at the trend, the year-over-year change is somewhat more reliable if we’re trying to get a handle on the business cycle. On that front, today’s release suggests that nothing much has changed vs. recent history. Retail sales advanced 3.7% last month vs. the comparable year-ago figure. That’s up, by the way, from March’s 2.9% annual pace.
Consumer spending, in other words, reveals no clear and present danger signs of rolling off the edge. Yes, it may all come crashing down tomorrow, and we’ll no doubt be advised of that risk in the coming days, when the dark princes of macro roll out a new wave of warnings. But if you’re looking for unambiguous threats to the slow-to-moderate growth narrative that’s prevailed for some time, you won’t find it in today’s retail sales update.
Well, perhaps you can, if you look real hard. But your challenge is tougher if you’re also searching for confirming signs of darkness from other indicators. No dice when it comes to payrolls in April, which continued to advance at a modest pace while last week’s update on initial jobless claims slipped to another five-year low. In fact, a broad review of economic and financial indicators still suggests that slow growth remains the path of least resistance until further notice, a trend that drew support in last week’s update of the Macro-Markets Risk Index.
The first lesson in business cycle analysis is rather obvious: the economy is growing most of the time. As it happens, the current expansion is weak and vulnerable to any number of hazards that lurk here and abroad, but it’s growth nonetheless. A couple of centuries of history tell us that we should only assume otherwise upon a persuasive set of statistical smoking guns. Those guns have been MIA for some time, even if a few numbers have turned wobbly at times.
One day the tide will turn, a fate that happens to be another striking empirical fact in the historical record. But unless you’re trying to draw attention in a TV interview, you should wait for the numbers to tell us to press the panic button. That’s a boring way to practical macro analysis, but it redeems itself by minimizing the number of false warnings that tend to accompany a more media-friendly approach for looking ahead. Yes, we'd all like to be early when it comes to calling major turning points in the business cycle, but there's something to be said for being right, too. The question is, how do you blend a practical mix of the two? We can start by avoiding the usual approach of jumping off the deep end every time we see a new number.