Monday, 11 of December of 2017

Economics. Explained.  

Retail Sales

November 15, 2017

Retail sales jumped 1.6% in September after having fallen 0.1% in August.  The August drop reflects the downward bias to sales in the wake of Hurricane Harvey which clobbered Texas between August 25 and August 29.  The September surge in sales reflects the beginning of the rebuilding effort in both Texas and Florida.  During the course of the past year sales have risen a solid 4.3%.  Consumer spending continues to chug along despite the hurricane-induced distortions.

Sometimes sales can be distorted by changes in autos which tend to be quite volatile.  In this particular instance the unit selling rate for car sales surged in September as cars lost during the two hurricanes must be replaced.

Fluctuations in gasoline prices can also distort the underlying pace of retail sales.  If gas prices rise, consumer spending on gasoline can increase even if the amount of gasoline purchased does not change.  Gasoline sales rose 5.8% in September after  having risen 4.1% in August.  Clearly, higher gas prices are boosting the overall increase in sales, but do not reflect an actual increase in the volume of gasoline sold.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales rose  0.1% in August and then 0.5% in September.   In the last year retail sales excluding cars and gasoline have risen 3.8%.  No slowdown evident from looking at these sales data despite the hurricane-affected August and September distortions.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments (like Macy’s, Sears, K-Mart, and Limited) the reality is that they need to develop a better business model.  The action these days is in non-store sales which have been growing rapidly. Consumers like the ease of purchasing items on line.  While sales at traditional brick and mortar general merchandise sales have risen 2.9% in the past year, on-line sales have risen 7.4%.  As a result, their share of total sales has been rising steadily and now stands at 10.7% of all retail sales.

We believe that retail sales will continue to chug along at a 2.5% pace for some time to come..  First of all,  existing home sales are selling at a rapid clip and would be selling at a faster pace if there were more homes available for sales.  Consumers do not purchase homes and cars — the two biggest ticket items in their budget — unless they are feeling confident about their job and the future pace of economic activity.  If home sales are holding up well, car sales should  remain solid in the months ahead.

Second, the stock market is at a record high level.  That increase in stock prices boosts consumer net worth.

Third, all measures of consumer confidence areat their highest levels thus far in the business cycle, and consumer sentiment from the University of Michigan is at its highest level since the early part of 2004.

Fourth, cuts in individual income tax rates are likely later this  year or in 2018.

Finally, the economy is cranking out 170 thousand new jobs every month which boosts consumer income.  Consumers have paid down a ton of debt and debt to income ratios are the lowest they have been in 20 years.  That means that consumers have the ability to spend more freely and boost their debt levels if they so choose.

Thus, the pace of consumer spending seems steady.  We continue to expect GDP growth to quicken to 2.8% next year.

Stephen Slifer


Charleston, SC

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