Economic First Look: Reading Into Retail Sales

 | Nov 10, 2012 | 10:30 AM EST
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  • Veteran's Day: Stock Market Open, Bond Market and Banks Closed


  • National Federation of Independenb Business (NFIB) Small Business Optimism Index, 7:30 a.m. (all times EST)
  • Treasury Budget, 2 p.m.


  • Producer Price Index, 8:30 a.m.
  • Retail Sales, 8:30 a.m.
  • Business Inventories, 10 a.m.
  • Federal Open Market Committee Minutes, 2 p.m.
  • John Williams, President of the San Francisco Fed (voter), speaks, 8:50 p.m.


  • Consumer Price Index, 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • Empire State Manufacturing Survey, 8:30 a.m.
  • Jeffrey Lacker, President of the Richmond Fed (voter), speaks, 9:00 a.m.
  • Philadelphia Federal Reserve Survey, 10 a.m.
  • Energy Information Administration Petroleum Status Report, 11 a.m.
  • Richard Fisher, President of the Dallas Fed (non-voter), speaks, 2:45 p.m.


  • Treasury International Capital, 9 a.m.
  • Industrial Production, 9:15 a.m.
  • Dennis Lockhart, President of the Atlanta Fed (voter), speaks, 4:20 p.m.

This week may bring some clarity to the disconnect between consumers and businesses, manufacturers in particular. Businesses have been more circumspect about the economy's prospects and the particularly potential political gridlock, and they may curb hiring if their concerns continue, as I discussed recently in All Revved and Stymied. Meanwhile, I have been writing that Americans are spending more freely -- consumers aren't fearful, despite caution by potential employers. At some point, that circle needs to be squared.

We may find out more this week in upcoming data. The retail sales report from the Census Bureau on Wednesday will bring us fairly straightforward data on consumer spending. However, be sure to compare it with the Bureau of Labor Statistics' Consumer Price Index inflation data, due out Thursday. 

Retail sales figures are not adjusted for inflation, and the headline number can be skewed by price changes, particularly for gasoline and food.

Meanwhile, automobile sales can be skewed by promotions. So, while they are important, they can be a large and somewhat volatile category in the retail sales report and are best examined separately. Where I focus my attention is the component in the retail sales report that also gets fed into the gross domestic product report for consumer spending. This excludes gasoline, automobiles and building materials. (Building materials goes into residential fixed investment, not consumer spending, and is derived from different sources.)

U.S. consumers may keep up their spending habits. They are quite optimistic, after all, as we see in the Consumer Sentiment survey released Friday from Thomson Reuters/University of Michigan. The index rose to 84.9 from 82.6 in October, making for the fourth straight increase and the index's highest since July 2007.

Even more important, the sub-index of consumer expectations six months from now, which more closely tracks the direction of consumer spending, increased to 80.8 from 79 in October. This is the best reading since July 2007. The gauge of current conditions rose to 91.3, the highest since January 2008, from 88.1 the prior month.

What may hold consumers back, though, is a lack of income growth. The caveat, is that we often look through the lens of aggregate data. That may belie different behavior patterns among different groups of consumers.

For example, in a Bloomberg survey, college-educated respondents are hopeful rather than fearful by a 2-to-1 margin. Consumers who earn $100,000 or more are optimistic rather than pessimistic by a 3-to-1 margin.

That is hardly surprising: Workers over age 25 with a bachelor's degree or higher have an unemployment rate of just 3.8%, while those with a high school education have an unemployment rate of 8.4%. Meanwhile, 12.2% of those without a high school education are unemployed.

Would it really be so difficult to believe that there may be different spending patterns among different groups of consumers, segregated by education, employment status and income levels? Probably not. Thus, when looking at disparate retail stocks, you may see patterns emerge that can't be captured in a broad-level report like retail sales.

Even as the retail sales report is fairly simple and straightforward, and may be limited in its ability to differentiate spending patterns below the surface, the manufacturing data are more complex. It's not just a question of whether manufacturers have more orders or fewer, it's a matter of why this is so.

Inventory levels can influence production and new orders. Friday we received the Wholesale Sales and Inventories report from Census Bureau. Even though wholesale sales were up 2% from last month, and up 4.4% from September of last year, inventories at wholesalers nonetheless increased by 1.1% from last month and by 7.5% from a year earlier.

The inventory-to-sales ratio is now at 1.19, above its long-term average. Though it isn't terribly high, it is at a level where wholesalers are probably going to order fewer items from manufacturers. The inventory build is probably voluntary, given the level of sales, but there's only so much room on store shelves and in warehouses.

Manufacturing activity can thus diverge from final sales. If we see some softer manufacturing numbers, we know why. It isn't necessarily because domestic sales are suffering; it's more of an inevitable inventory correction. Of course, export activity can be blamed for some of any softness, not just inventories.

Of course, manufacturing can slow because economic activity overall is weaker, but it is hard to disambiguate the causes for short-term fluctuations. Results from the Empire State Survey have been in negative territory for the past three months, while the Philly Fed Survey outcomes have bounced around zero recently.

We'll want to keep close tabs on the subcomponents, especially new orders, along with delivery times and unfilled orders, to get a sense of where manufacturing is headed. Employment and workweek data are also important leading indicators.

For both surveys, all of these items have been in negative territory very recently. These can be problematic signs, so we'll have to closely monitor these data, though we must remember the caveat of why these data are what they are.

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