Back again with another installment of the Retail Sales Report. As I always say, this is one of the most useful of the intra monthly reports as it allows you to see both how much the all important U.S. consumer is buying, as well as identify trends in their spending. Consumer spending drives 70% of the U.S. economy, so it's one of the better ways to see which way U.S. growth is heading.
This month's report is very hard to decipher. You have 2 important special considerations to take into effect; The Debt Ceiling Crisis and Hurricane Irene.
As far as the Debt Crisis, it has been theorized that it would cause employment, investment and spending to be put on hold as people around the world held their breath to see if the U.S. government would induce a probable global financial meltdown. Although cooler heads eventually prevailed, the subsequent downgrade of U.S. debt by Standard and Poors as well as a lingering fearfulness boded poorly for those three critical areas of economic growth.
We already know how the employment report turned out; disappointing (no, it was not "horrible" as some said, far from it). What about the consumer?
At flat growth (±0%) it was both disappointing but relieving; a disappointing number for normal circumstances, but a relief that it didn't contract (or even crash). I think it's fairly obvious that the Debt Crisis did negatively affect these numbers because despite a trend of normalizing auto sales, this month motor vehicles dropped -0.3%. Autos are a big purchase and people have to feel confident about their employment and the economy to buy, and the drop this month is a clear indicator that the crisis rattled consumers.
When you factor Hurricane Irene, which partially sidelined a week of buying in the most populated part of the country, this report could have been much worse especially considering back to school seasonal adjustments.
Now let's take a look at the individual categories and see if we can find anything about investing.
Overall, it's a pretty flat month. Removing Auto from the equation only changes the overall sales number to +0.1%.
Gas and food inched upwards at 0.3% each. That is fairly interesting because the price of gas dropped according to today's PPI report. That means gas demand itself must be improving. Investor Watch: again, I can highlight any number of good integrated oil and gas producers that have dropped vastly over the last few months like Hess (NYSE:HES), Exxon Mobil (NYSE:XOM) and EOG (NYSE:EOG).
Clothing dropped 0.7%, but is still up 5.6% year on year. With cotton prices coming back to normal, some of the margin pressure is subsiding. Investor Watch: American Eagle Outfitters (NYSE:AEO) has dropped 40% off highs, is yielding over 4% and is a good takeover target
Nonstore E-tailers continue to grab share, expanding 0.5% compared to department stores 0.1%. This has been an ongoing story for years. Investor Look Back: I recommended Amazon (NASDAQ:AMZN) while it dropped, and it has already regained nearly all its losses trading near all time highs.
Restaurants continue to struggle at -0.3% , and they are another very important leading indicator of consumer confidence. This needs to be watched carefully as it possibly portends continued weakness in spending. Investor Watch: Be careful with high flying restaurant stocks like Chipotle Mexican (NYSE:CMG). At 51X earnings, all it will take is a quarter that doesn't mean exorbitant expectations to send this stock down.
The brightest spot in the report is in hobbies! A whopping 2.4% increase shows people are still willing to spend on something fun.
And finally, still grabbing my personal investment interest, building materials pulled off a slight expansion at 0.2% to bring it to a strong 6.7% year on year expansion (the same as the much discussed food category). Construction is showing signs of life. Investor Watch: in addition to the obvious Home Depot (NYSE:HD), look into clobbered steel stocks like Nucor (NYSE:NUE) and U S Steel (NYSE:X). A rebound in construction could make you a fortune off the cyclical steel stocks, and they reported strong pricing and sales in q2.
Overall, this report, while disappointing in any normal context, could have been much worse given the circumstances of a near debt default by the United States and a damaging hurricane raking the East Coast. I'm calling this report a win. As always, next month will tell U.S. more, especially in regards to the fading of the Debt Crises as well as a bottom stock market and whether that will induce consumers to return to the trend of increasing spending.
Disclosure: I am long NUE.