Retail Sales Report - Decent Retail Sales Growth
The September retail sales report was controversial in that both the bulls and the bears used it to support their narratives.
With stocks falling on Monday, the bears were gaining confidence and ready to declare another victory. I disagree with the bears. I think this was a continuation of the solid trend this year, making it good news.
Retail Sales Report - The Negative View
Let’s first review the bearish argument and then get into my opinion. Out 66 economists who made estimates for this retail sales report, all had growth coming in higher than it did.
Overall retail sales growth was 0.1% month over month which missed the consensus for 0.6%. Growth was the same as August.
There was a sharp deceleration on a year over year basis as growth fell from 6.5% to 4.7% which is the lowest growth rate since February.
As you can see from the chart below, the 3 month average of year over year overall retail sales growth was 5.94%. This is the first deceleration in 6 months.
It’s still one of the strongest 3 month average growth rates of this expansion. That is, outside of the reports following the recession which had very easy comparisons.
Real retail sales growth is 2.4% which is below the expansion average of 2.7%. It could have been way worse if inflation would have improved.
Retail sales excluding autos were down 0.1% month over month. Tetail sales without autos and gas were flat. Both missed estimates for 0.4% growth. I think real retail sales will easily recover later in the year once the effects from hurricanes are gone.
Retail Sales Report - The Optimistic View
That brings us to the optimistic analysis of this report.
Hurricane Florence impacted these results. Unfortunately, hurricane Michael will affect October’s results. This means we won’t have data on retail sales unaffected by hurricanes until November. That includes the holiday shopping season. My baseline expectation will be positive until the labor market shows signs of weakness.
As you can see from the chart below, the control group’s sales growth rate makes this report look great.
Month over month sales growth was 0.5% which was an improvement from flat growth in August and beat estimates for 0.3% growth. Year over year growth was 5% which was one of the best growth rates this expansion.
The highest was 5.9% in July 2011. 5% growth is much higher than the growth rates prior to the last two recessions which were 2.9% and 3.3%.
This reinforces the obvious point that there won’t be a recession in 2018. Control group retail sales are used to calculate the personal consumption expenditures growth rate which is a component of GDP. The control group excludes food services, auto dealers, building materials, and gas stations.
Retail Sales Report - Hurricane Florence Impacted This Report
Regardless of whether you personally want to follow the headline number, real headline growth, or control group results, this report was good for GDP growth. GDP uses the control group.
Auto sales were up 0.8%. This burst in growth was probably catalyzed by replacement sales related to hurricane Florence.
Because sales spiked so sharply last September, year over year growth was -4%. The boost from August to September last year was 1.637 million and the burst this month was 0.744 million.
That burst was less than half of last year implying the effect to GDP will be less than half. There should be another larger boost to auto sales in October related to hurricane Michael.
Year over year growth will accelerate sharply because sales fell last October as replacement sales dwindled.
Retail Sales Report - The Boost in Sales Reversed the Recent Trend of Weakness
In the opposite vain, sales at gasoline stations and restaurants weakened because of the hurricane which is the opposite of their recent trends of strong growth.
Sales at gas stations fell 0.8% month over month and restaurant sales fell 1.8%. The fact that the control group doesn’t include restaurant sales and gas station sales explains why it beat estimates.
These 3 results included in GDP are 0.8% month over month growth in July, flat growth in August, and 0.5% growth in September.
Building material sales growth was 0.1%. Healthcare and personal care stores fell 0.3% and department store sales fell 0.8%. Department store sales were over 8% of total retail sales in the late 1990s and they are now 2.43%.
This decline in department stores is nothing new and is catalyzing weakness in retail employment. Department stores employ more workers per dollar of sales than online stores. Online sales and furniture stores growth were both 1.1%. Online sales are now 11.41% of total retail sales.
Retail Sales Report - And The Strong Empire State Report
This was a mostly strong October Empire Fed manufacturing report, but future expectations weakened slightly.
General business conditions were 21.1 which beat estimates for 18.8 and last month’s reading of 19. The new orders index was fantastic as it increased to 22.5 from 16.5.
This is one of the best readings of this expansion and the highest since June 2017. Shipments increased 12 points to 26.3 and unfilled orders fell 13.3 points to -8.4.
That shows capacity constraints were alleviated. Inflation also fell which is in tune with the September CPI report as prices paid fell 4.3 points to 42 and prices received fell 2 points to 14.3.
Even though the new order index was strong, future estimates weakened. Expectations for general business conditions fell 1.3 points to 29. The new orders index increased 1.8 points to 35.1.
As you can see from the chart below, the 6 month expectations for capex fell 3.5 points to 16.
Most components in the 6 month expectations section fell. Prices paid fell 3.2 points to 52.9 and prices received fell 7.4 points to 23.5. The expectation for technology spending fell 1.4 to 9.2.
As you can see from the chart below, the ISM-like weighting of the Empire Fed survey implies the manufacturing ISM PMI will fall. This is just one of the regional Fed reports, so I’m not ready to be bearish on manufacturing in October yet.
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