Retail Sales: A Whiff

by: Karl Denninger
Today brings us the "Advance Monthly Sales for Retail and Food Services, January 2011" report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $381.6 billion, an increase of 0.3 percent (±0.5%)* from the previous month, and 7.8 percent (±0.7%) above January 2010. Total sales for the November 2010 through January 2011 period were up 7.6 percent (±0.5%) from the same period a year ago. The November to December 2010 percent change was revised from +0.6 percent (±0.5%) to +0.5 percent (±0.3%).

Expectations were for 0.6%, so that's a hell of a miss. Oh, and note the revision; so from the unrevised, the number was 0.2, not 0.3.

We've got some issues here in the detail table -- and I don't like them.

[Click to enlarge]

Why did I highlight the areas I did? Primarily because ex-seasonal adjustments in these areas are trending the wrong way, and few are trending the right way. You can argue with the seasonal adjustments if you want; I personally don't believe a lot of them, but that's water under the dam when both adjusted and unadjusted numbers agree.

The other issue here, and potentially the most serious one, is that the payroll tax cut took effect in January. So we should have seen that in retail sales, and yet we didn't. The entire premise of people "feeling better" or "more wealthy" was that cutting the payroll tax on the employee side would result in an immediate spending boost.

It didn't happen.

We appear to be getting to the point now of negative returns. That is, further stimulus measures don't stimulate. This is exactly what I expected to happen in 2007, in that the reason we hit the wall was due to excessive debt, not excess production as in a common inventory recession. Prodding people to spend beyond their means doesn't work in a debt-led recession, because they're already deep into the hole and eventually people stop digging. Sadly for many (if not most) Americans, they stop digging when the hole collapses on them and they're buried, to some extent because of the inane and outrageously dishonest "reporting" that one finds in the mainstream media (which of course only exists because you buy things; that is, advertising supports their operations.)

To those who argue that the media should do things differently, I will simply observe that this is similar to arguing that a rattlesnake should not bite. It does, however, simply because it's a snake. Expecting different behavior from the snake is illogical.

The equity markets thus far have gone along with the story that we can shift, for some unknown period of time, debt creation and acceptance from the private sector to government, and by so doing continue to put up good economic numbers. This report, along with continuing comments on margin squeezes out of various firms during the 4Q earnings releases, makes pretty clear that the macro view that I've been espousing since August of 2010 or thereabouts is going to show up right about when I expected it to, or between now and the second quarter of 2011.

I expected the markets to start discounting this reality in the fall. They instead decided to pay attention to Bernanke and his puerile vomit about how "QE2" would save us. Well, if it was going to save us, would someone tell me where it's supposed to show up? QE2 as a percentage of the economy was about 4.2%, so if we had 2% organic growth then we should be putting up 6% numbers on GDP.

We're not; we are in fact putting up negative numbers when one subtracts the QE2 component, and the so-called "stimulant" effect of the payroll tax cut is a big zero as well, despite adding nearly $500 billion to the deficit this year alone. When debt accumulation becomes negative to economic outcomes, you're in big trouble ... and I believe there's an argument to be made that we're either there or damn close.

Eventually this dynamic forces you to stop and take your medicine.

Coming into an environment where the most recent stimulative tax cuts didn't stimulate, this is likely to bring us some interesting economic releases. My expectations are for serious profit declines, which should become apparent in the first quarter reports and lead to a full-on profit collapse by the end of 2011. Exactly how long the markets will ignore these realities is difficult to determine, but I will say this: If you've made some nice money in the stock market on the back of so-called "recovery," your "use by" date has expired and in my view you're now living on borrowed time.