January’s Consumer Spending Numbers: The Big Increase That Wasn’t

So the big economic news this week was the “surprise jump” in YoY consumer spending; various media outlets trumpeted the news and the markets rose as a result. Even the dollar rose on the news.

From Bloomberg:

Retail sales in the U.S. unexpectedly rose in January, easing concern that the world's largest economy has already slipped into a recession.

The 0.3 percent increase was led by spending on autos, clothes and gasoline, the Commerce Department said today in Washington. The figure followed a 0.4 percent decrease the previous month. Purchases excluding automobiles and gasoline were unchanged from December…

…Department-store sales dropped 1.1 percent, today's report showed. Stores selling building materials reported a decrease, as did sellers of electronics, appliances and sporting goods.

Retail sales were projected to fall 0.3 percent after an originally reported 0.4 percent drop the prior month, according to the median estimate in a Bloomberg News survey of economists.

From Reuters via Yahoo News:

Stocks rallied for a third session on Wednesday after a surprise gain in January retail sales suggested consumer spending was holding up even as other data has pointed to a recession…

…Government data showing higher retail sales last month bucked economists' expectations for a decline. The report also took investors by surprise because it followed an anemic January jobs report and a shrinking services sector…

…The Dow Jones industrial average (.DJI) was up 178.83 points, or 1.45 percent, at 12,552.24. The Standard & Poor's 500 Index (.SPX) was up 18.35 points, or 1.36 percent, at 1,367.21. The Nasdaq Composite Index (.IXIC) was up 53.89 points, or 2.32 percent, at 2,373.93.

From the DailyFX:

The US dollar continued to rebound as consumer spending snapped back in the month of January, skirting a repeat of 2001….

...However not all businesses saw an acceleration in spending. Furniture, electronics, building equipment, sporting goods and department stores all reported sharp declines. The data was positive for the dollar against the Japanese Yen, but that was it. The dollar remained unchanged against the rest of the major currencies such as the Euro and British pound.

When I read the headlines I was expecting an actual strong number instead of the weak nominal increase of 0.3%, which was really only celebrated because it beat the forecast of -0.3%. Once I saw the actual numbers I couldn’t (for the life of me) understand what the fuss was all about, the celebrated number of 0.3% includes GASOLINE and the retail sales increase for January was only 0.1% ex-fuel expenditures. How can anyone take a consumer spending number seriously that doesn’t factor out Gasoline, especially considering the sharp increases in fuel costs over the past year?!

Did the markets and the media simply choose to cheer the top-line number and decide not to look under the hood for the real story? How can you celebrate a top line consumer spending number that includes fuel? The claims of “strong consumer spending”, “easing recessionary concerns”, “the U.S. consumer is still strong”, etc, all seemed fatuous if you really thought about, well, “economic reality”.

1) When you look past automobiles, fuel, and clothing, the YoY numbers were not good with practically every major category showing a YoY decrease.

2) A weak number that beats a bad expectation is not a cause for celebration.

3) The consumer spending numbers are reported in nominal figures, meaning they’re not adjusted for inflation. Based on the Government’s inflation ex-inflation (© Barry Ritholtz) numbers the YoY increase is negative, based on the real inflationary numbers that actually hit people’s wallets, the numbers were REALLY negative. The commerce department’s consumer spending numbers are worthless until they’re adjusted for inflation. The 0.3% is probably nothing more than a measure of grocery inflation compared to last year.

4) Practically every retailer had a bad month in January, and Wal-Mart’s (WMT) “positive” results were more a measure of grocery inflation than anything else. Even Costco’s (COST) results need to be considered within the context of grocery inflation and people shifting spending from other retailers to Costco.

5) Any intelligent discussion of consumer spending, the risk of a recession, etc, needs to look at multi-month trends, not a single month’s worth of data. The pattern of the markets weeping when there is a month of bad data and celebrating the next is nothing more than reactionary thinking or the markets looking for any reason to celebrate; the multi-month consumer spending trend is negative and January’s numbers do little to change that. The markets should focus on the trend, not the data from a single month.

6) Did it occur to anyone that many consumers were merely buying things they put off buying in December? Consumers have to spend a certain amount per month to operate their households, reigning in a particular month’s spending often creates needs that need to be fulfilled in the following month. E.g. you’re worried about your finances in December so you put off an oil change, a home repair, a semi-discretionary purchase, etc, in January or February your finances improve and/or you’re no longer able to delay the purchase so you go ahead and spend the money. What appear to be a single month increase (or recovery), is potentially still negative or flat when you consider the multi-month trend.

The fact that January’s number was portrayed as strong by the media and accepted as such by the markets, despite the inclusion of fuel and practically every major spending category showing a decline is just ridiculous. This is clearly a case of people just wanting something positive to believe in and the media wanting a big headline.

January’s consumer spending numbers don’t change the multi-month downward trend in consumer spending, are really measuring inflation and are nothing to celebrate. The idea of “intelligent, efficient” markets goes out the window every time the market celebrates bad data disguised as good and/or when that data is trumpeted by the media. Perhaps the reaction to January’s numbers is a study in a market desperate for good news, and media outlets who blindly report certain data points as positive without doing any real analysis first.

Sources:

Bloomberg: “U.S. Economy: January Retail Sales Unexpectedly Rise” -- Shobhana Chandra, February 13, 2008.

Reuters (Via Yahoo News): “Market rises as retail sales sooth economy fears” – Jennifer Coogan, February 13, 2008.

DailyFX: “Strong Consumer Spending Drives Dollar Higher” – Kathy Lien, February 13, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.