Real Retail Sales Fall to 2003 Levels

Wednesday, we noted that the market "wanted" to rally, courtesy of its oversold condition. Dropping nearly 5% in the previous week does that to traders. However, there is no need to tilt against windmills -- be it Buffett's Muni bond grab or Wednesday's Retail sales data. Smart investors need only look beneath the headlines, and figure out what is really going on.

Let's use the Retail sales data as an example: Census Bureau reported surprising Retail sales data for January, rising by 0.3% (versus consensus of -0.3%). We stated this reflected energy inflation, not sales growth. Some people disagreed with that assessment, so for them, we will go into the details.

Our first chart, via Mike Panzner, shows year-on-year retail sales (ex-autos). As Mike notes:

"Even that series makes the retail picture look far better than it actually is. When you subtract out gasoline station sales, which have been boosted by rising prices for fuel, the year-on-year change is 2.6%, the lowest pace since April 2003 (see attached). Indeed, gasoline station sales as a percentage of retail sales (ex-auto) recently hit a record high of 13.1% versus a median rate of 9.8% since January 1992."

The chart shows the divergment:

Chart courtesy of Mike Panzner

Why ex-autos? Commerce reports a 0.6% rise in car sales January, while the vehicle manufacturers themselves reported a 6.3% drop in unit sales. The FT noted this differential, quoting Rob Carnell, economist at ING Financial Markets: “There are too many other indicators pointing in the opposite direction for the rise in retail sales in January to be accepted at face value, and we would expect some of this month’s discrepancy to be unwound in the February report."

But even that is still a nominal data series. If we want to see Real Retail Sales, we need to fully adjust for the pernicious effects of inflation. Haver Analytics has done the heavy lifting for us, and as the chart below shows, Real Retail Sales fell to levels not seen in 5 years:

Chart courtesy of Haver Analytics

This is the first negative Real number this cycle. This strongly suggests a US recession is either underway or due any month now. And that's using CPI as the inflation adjustment factor. It's well understood amongst The Big Picture readers that CPI understates inflation.

Consumers are paying more for Food and Energy, to the point that Real Retail sales are negative. What does this say about future discretionary retail spending?

Source:
Overview: Failed muni bond auctions deepen crises
Dave Shellock in London and Michael Mackenzie in New York
FT, February 13 2008 18:20
http://www.ft.com/cms/s/0/575ea158-da60-11dc-9bb9-0000779fd2ac.html

Comments

[User 124892:]

DON'T WORRY BE HAPPY!

2008 Feb 14 05:07 PM

[Alpha Seeker:]

Another overly bearish article. The author is attempting to lie to the readers, because, it is not that "retails sale fall to 2003 levels", but the rate of increase falls to this levels, which is not the same and much less important. But it does mean that the author is biased in favor of shocking us with negative data, in order to gain personally from what we may believe to be some short positions.

2008 Feb 15 01:26 AM

[zenalgorithm:]

I'm going to invest my tax rebate and use it to short this market!

2008 Feb 15 01:37 AM

[User 129600:]

Advice to Alpha Seeker:
Just forget about whether it is the absolute or relative change, or rate of change. If you look at the first chart, it is painfully clear that we are approaching a level seen 6 years ago, and we all know what happened back then.

2008 Feb 15 02:44 AM

[Alpha Seeker:]

Dear User 129600 a.k.a. Barry Ritzholtz, the author of this article:
Try giving advice to your Dad. You are misleading the readers with this title. This is not an indicator worth trading to, it is severerly lagging and manilulated not only by the statisticians but by the collectors of the data. In addition, if you remember the market bottomed in 2002-2003 and rallied like crazy.

2008 Feb 15 11:20 AM