Are Retail Sales Good For the Economy?

by: David Andrew Taylor

For two months in a row we've gotten some pretty good retail sales numbers, indicating that the economy is moving forward firmer than most have predicted. Two questions. First, what can we expect in future releases, and second, what picture does this paint overall?

To answer the first question, let's look at the latest charts on retail sales. Here's a look at the y/y change:

click to enlarge
headline retail sales 1966-present

We've seen some growth in retail sales the past few months. However, as this chart shows, the y/y change is still sitting in the bottom. There's plenty of room for movement to the upside. Will we see that, and if so, when?

Again, let's go to the charts:

personal income v retail sales 1965-present

In this chart, the blue line is retail sales, and the red line is personal income. As the rate of growth in income increases, the rate of growth in retail sales increases. The past several months has seen significant increases in the rate of growth in incomes. In fact, the rate of growth in income exceeds the rate of growth in inflation. I'm expecting very firm readings in the coming months in retail sales.

But, is this necessarily good for the U.S.? That depends largely on your view from the stands. If you are a currency trader, this would certainly be good news for the dollar. Firmer growth on the retail level means further rate increases as the economy continues to get firm. Aggregate demand is going to push commodity and resource prices up higher and higher.

If you are a bond trader, then the idea of higher interest rates gives an inverse relationship to price, and bonds are going to sell off as those interest rates move higher. So many have been calling on the Fed to lower rates. I've been clamoring that the last thing the Fed is going to do is lower rates. Here's another example of how that is looking less and less likely.

10year note

If you are an equity trader, perhaps the idea of more interest rates is a bit nerving. However, the equity markets have remained resilient, and are even pushing higher. Keep in mind, higher interest rates widen the differential between certain countries, such as Japan. And with the ECB sitting on their hands, the attractiveness of bonds outside of Europe will continue. The dollar will benefit.

s&p500

There is another major factor keeping equities propped up. Have you seen oil lately? The drop in commodities is getting more and more pronounced. The lower input cost is positive for equities. And certainly I am a believer that there is more room for lower oil.

As for Friday morning's price action in the dollar, I think it has more to do with lack of follow through and then profit taking. When the retail sales numbers came out, the dollar popped up against the Euro, only to then sell off. I think the fact that we've gone from 1.3300 all the way down to about 1.2850 in a week has been enough for some take some profits. Overall, the general trend still exists. I'm buying dollars vs. most of the majors and will continue to do so as long as we continue to see good news like this.