The retail sales report released Tuesday by the Commerce Department showed a modest weakening for the month of April with a 0.2% decline, matching expectations. The decline can be attributed to motor vehicles falling 2.8%.
However, outside the hard-pressed auto sector, retail sales increased 0.5%, topping the median estimate that called for growth of 0.2%. Additionally, the recorded growth was not caused from an increase in gasoline sales. Gas station sales printed an April decline of 0.4%.
Sales excluding autos, building materials, and gas were up during April, revised upward for both February and March, posting a solid 3.4% increase versus a year ago.
Worth noting is that this report shows strong pace of first-quarter productivity that could subsequently lead to higher corporate profits. It is also consistent with a US economy currently not in a recession and not likely to go into one in fiscal ‘08.
Most journalists and financial analysts continue backing their recession-theory based solely on the formula: ‘falling home prices equal a downturn in consumer spending and credit crisis will lead to a credit crunch’.
The pretense for this theory has yet to materialize and is based on the premise that a dampening effect from lower home prices and credit crunch will cause an economic decline in a very broad-based fashion. This consequently will cause a great consumer pullback, impacting GDP growth while leading into a recession dispersion that will appear fast - which in turn will cause the whole system of production, distribution and consumption to start unavoidably receding.
Even if this logical argument were true, at this point, the economic decline is neither long enough nor deep enough to even remotely satisfy the duration or depth recession criteria. Additionally, the housing crisis and credit crises was never anywhere near as bad as the media naysayers have been claiming.
The Fed’s H.8 report in the credit side of things, proves it. Total commercial and industrial loans have been rising steadily for the the past nine months. Growth in business loans for the last five months has been above 20%, the strongest period of growth in commercial loans since mid ’70’s. Companies with solid, normal businesses have ample access to credit while real estate loans outstanding remain up.
The reality is that the underlying drivers of the economy are quite solid. Monetary policy is not tight. Tax rates are still relatively low and productivity is still growing. Consumer spending despite the media-induced fear campaign kept rising during the first quarter of fiscal ‘08 and will keep rising. Furthermore, let’s not forget the strong impact the stimulus package already on the way will have once injected into the veins of the economy.
Bottom line: The market recognizes the fact that we have a financial problem and not necessarily an economic or profit problem. The important individual monthly indicators are displaying an divergent behavior consistent with a non-recession scenario. Consumer spending remains resilient with core retail sales up at an annual rate of 2% in the first Q of fiscal ‘08. The initial unemployment claims data are not even near recession numbers. That’s why a recessionary economy is a premature conclusion, since the argument rests only on assumptions that are thus far not supported by data.