More Disappointing Retail Sales

by: Tim Iacono

A short time ago, the Commerce Department released the retail sales data for the month of February and, to the surprise of many economists, the news wasn't good. Overall retail sales declined 0.6 percent, the second decline in the last three months and, on a year-over-year basis, sales are up only 2.6 percent.

The 2.6 percent annual gain is well below the "official" rate of inflation which came in at 4.4 percent in January (the February consumer price data will be released tomorrow). This means that, since retail sales are not adjusted for inflation, we are now experiencing negative "real" growth in this important area.

Recall that personal spending accounts for roughly 70 percent of economic activity in the U.S., a freakishly high number that, unfortunately, far too few observers have seen for what it is - completely unsustainable.

Motor vehicle sales fell 1.9 percent and are now down 4.2 percent on a year-over-year basis and, part of the continuing fall-out from the housing bust, sales of furniture and home furnishings dropped 0.4 percent in February and are now down 4.3 percent from a year ago as shown below.

It seems hard to believe that, just two years ago, the entire nation was still on one giant shopping spree to buy stuff for their homes. From 2003 through early-2006, when home prices were still rising and the housing bubble was winding its way to its inevitable fate of meeting up with a very sharp pin, it seemed there was just no limit to the amount of stuff people would buy to stuff inside their house.

Similarly, sellers of building material and garden equipment are finding fewer and fewer customers now that the home improvement craze has morphed into the "You walk away" craze. These sales declined 0.7 percent last month and are now down 4.2 percent from a year ago as shown below.

That was quite a run there from 2003 all the way into 2006.

Note the differences between the last two charts - home furnishings had booms of about equal magnitude for the stock market bubble and the housing bubble while the home improvement stores had a single, much bigger boom during the housing bubble.

By far, the strongest category in the retail sales report over the last six months has been "gasoline station sales" as you can see below. Excluding gasoline station sales from the year-over-year total results in overall retail sales gaining just 0.86 percent rather than the 2.6 percent figure noted above.

What we really need is another one of those energy sell-offs like the one that started in August of 2006 - otherwise the home-improvement and furniture stores don't stand a chance.