Economic First Look: Focus on Retail Sales

 | Nov 12, 2011 | 8:45 AM EST
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  • James Bullard, President of the St. Louis Fed (non-voter), speaks, 7:30 a.m. (all times EST)
  • Charles Evans, President of the Chicago Fed (voter), speaks 8:00 a.m.
  • Producer Price Index, 8:30 a.m.
  • Retail Sales, 8:30 a.m.
  • Empire State Manufacturing Survey, 8:30 a.m.
  • John Williams, President of the San Francisco Fed (non-voter) speaks, 9:30 a.m.
  • Business Inventories, 10:00 a.m.
  • Jeffrey Lacker, President of the Richmond Fed (non-voter), speaks, 11:15 a.m.
  • Richard Fisher, President of the Dallas Fed (voter), speaks, 12:30 p.m.


  • Consumer Price Index, 8:30 a.m.
  • Treasury International Capital report, 9:00 a.m.
  • Industrial Production, 9:15 a.m.
  • Housing Market Index, 10:00 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.
  • Jeffrey Lacker, President of the Richmond Fed (non-voter), speaks, 11:15 a.m.
  • Eric Rosengren, President of the Boston Fed (non-voter), speaks, 12:45 p.m.


  • Housing Starts, 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • Philadelphia Fed Survey, 10:00 a.m.
  • Sandra Pianalto, President of the Cleveland Fed (non-voter), speaks, 12:30 p.m.


  • Leading Indicators, 10:00 a.m.

This week is busy on the economic news front; we have quite a few Federal Open Market Committee (FOMC) members speaking, as well as key inflation data and several manufacturing indicators, not to mention retail sales and a few housing metrics. In this issue of the weekly "Economic First Look," we'll preview the Retail Sales due out on Tuesday, but we'll do it, ideally, in conjunction with the CPI data that comes out Wednesday.

I'm interested in the consumer angle because last month's Retail Sales report showed that consumers had been spending, even though confidence was weak and wage gains minimal. (I discussed this in my column, "The Consumer Mind Meld".) On Friday morning, however, we saw that the Thomson Reuters/University of Michigan preliminary index of consumer sentiment for November rose to 64.2 – the highest in five months – from a final October reading of 60.9.

This number was above the consensus forecast, and the key "expectations" component of the index rose to 56.2 from 51.8 in October. While still at low levels, the expectations metric tends to be more correlated to future consumer spending patterns than is the headline measure and, thus it is a bit more encouraging.

What I am looking for in this week's report on retail sales, however, is whether September's 1.1% gain in headline retail sales continued into October or if it was a blip. October same-store sales reported by major chain stores earlier this month came in a bit mixed and below expectations. The year-over-year 3.8% sales gain was less than the projection for a 4.4% increase and could suggest a bit of a pullback in the Retail Sales data. I will note that  the aforementioned chain store sales data are reported year over year, not month to month, because of seasonal factors. (By the way, CPI advanced 3.9% for the headline and 2.0% for core in the year through September, just to put that sales increase into perspective.)

Also, remember that the data in the Retail Sales report are not adjusted for inflation -- or lack thereof, considering promotional events. As an example when factoring in inflation, look at last month's Retail Sales report covering September; we see that clothing sales were up 1.3%. But when the Bureau of Labor Statistics published the CPI report the following week, apparel prices had decreased by -1.1% during the month.

There are two ways to look at these data together: One is that real clothing sales advanced by roughly 2.4%, or so, which is a good thing. But, the second way to see it is that the price drop -- perhaps prompted by promotional activities for the back-to-school season -- influenced consumers to buy more clothing, which might have pulled demand forward from the following month.

The same thing occurs when looking at department sales, which saw sales grow by 1.1% in September. Was this increase due to one-time, promotional events in September, which will not show in the October data? Or, was it due to strong, sustainable demand that will continue in October and beyond? Based on the chain store sales data that I noted earlier, I am inclined to think it is the former rather than the latter. So, in this week's report, we'll see if there is any giveback of any sort.

When you look at the Retail Sales report, you always have to consider why certain categories are behaving as they are, and focus on the components, not the headline. Why? Because a big chunk of the headline consists of gasoline and food sales, which don't tell us much about spending on things of interest to investors in other consumer stocks. Also, gas and food sales are influenced by the price more than anything else, so price changes in these categories can swing the entire headline data -- and sometimes mislead.

Auto sales should be stripped out of the headline number, too. This is a large and volatile component since it can be influenced by promotions, not to mention some disruption in previous months (which has since faded) due to the Japanese earthquake and tsunami disaster earlier in the year. After taking out autos, food and gas from the report, you'll get a better measure of consumer spending patterns, which you can compare with the CPI data to see if spending patterns are due to price changes or increased consumption patterns.

A concern of mine, however, is the discrepancy between consumer income growth vs. consumer spending growth. The real weekly earnings metric (a function of hourly pay, hours worked and the CPI index), published by the BLS, showed that real weekly earnings grew by 0.2% in September, but retail sales advanced by 1.1% for the headline. Consumers have to make up the difference somewhere, which means they are saving less. This is consistent with earlier data, such as GDP data, which showed that consumer spending advanced by 2.4% in the third quarter due in part to a drop in the savings rate, which fell  to 4.1% in the third quarter from 5.1% in the second quarter.

This trend of increased consumer spending at the cost of their savings can only last so long. It may be necessary, though, for consumers to spend more first, in order for companies to hire, which will then lead to increased income. That might break the standoff between employers that are not willing to hire until sales improve and consumers not spending until hiring improves.

With spending now tied to expectations of higher income in the future, in this week's report we might see whether consumers are blinking first. However, I do think that we could see a softer Retail Sales report than September's, when looking through the details, since some sales may have been pulled forward by promotions, especially in light of the chain store sales data.



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