April 14, 2017
Retail sales fell 0.2% in February after having declined 3% in February and risen 0.5% in January. During the course of the past year sales have risen 5.1%.
Sometimes sales can be distorted by changes in autos which tend to be quite volatile. In this particular instance unit auto sales as well as the car sales component of retail sales have fallen in each of the first three months of the year.
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 fell 1.0% in March which appears to largely reflect an increase in gasoline prices and not any particular change in the volume of gasoline sales.
Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories. Such sales rosee 0.1% in both February and March after having climbed 1.0% in January. In the last year retail sales excluding cars and gasoline have risen 4.1%. No evidence of a slowdown in this series.
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 a meager 0.5% in the past year, on-line sales have risen a steamy 12.3%. As a result, their share of total sales has been rising steadily and now stands at 88.6% of all general merchandise sales. That percentage has risen 10.0% (from 79%) at this time last year.
We do not believe the recent softness in retail sales represents a change in trend for a variety of reasons. First of all, existing home sales are selling at the fastest rate thus far in the cycle. 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 rebound in the months ahead, As noted earlier, car sales are a particularly volatile category.
Second, the stock market is near a record high level. That increase in stock prices boosts consumer net worth.
Third, all measures of consumer confidence are at their highest level thus far in the business cycle.
Fourth, cuts in individual income tax rates are in store likely later this year.
Finally, the economy is cranking out 170 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, in our view, the first quarter weakness is sales is not a harbinger of a consistently slower pace of spending in the months ahead. We continue to expect GDP growth to quicken to 2.4% in 2017 and 2.7% next year.