Tuesday, 19 of February of 2019

Economics. Explained.  

Retail Sales

February 14, 2019

Retail sales plunged 1.2% in December which is the largest single-month decline since the end of the recession in 2009.  While that is clearly a disturbing decline it should be viewed as a temporary setback which will be reversed during the next several months for a variety of reasons.  First, the drop came in the midst of a 20% drop in the stock market during the fourth quarter.  Second, the Fed had not yet given an indication that it was going to refrain from further rate hikes.  And, third, the government shutdown began right round Christmas.  But the stock market has already recovered most of its fourth quarter loss.  The Fed said it is going to refrain from further rate hikes at least through midyear.  And the protracted government shutdown is now over.  Hence, retail sales should rebound in the months ahead.  Over the  past year retail sales have risen 2.7%.

Sometimes sales can be distorted by changes in autos and gasoline which tend to be quite volatile.  In this particular instance car sales fell 1.8% in December.  Gasoline sales plunged 5.1%.  Changes in gas prices  impact the overall change in sales, but they typically do not reflect any significant change 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 fell 1.4% in December.  Any way one slices it, sales across the board fell sharply at the end of last  year.   In the last year retail sales excluding cars and gasoline have risen 2.8%.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments  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 stores have risen 2.3% in the past year, on-line sales have risen 11.3%.  As a result, their share of total sales has been rising steadily and now stands at a rear record 11.3% of all retail sales.

Despite the December drop we believe that retail sales will rebound in the months ahead.  First, the stock market has recovered much of its fourth quarter decline.

Second, the economy continues to crank out 200 thousand jobs a month,  Those job gains will produce growth in income.

Third, because of those steady job gains real disposable income should continue to climb at a solid 2.8% pace which is roughly in line with its 25-year average growth of 2.7%.

Fourth, as the Fed tightened steadily for the past couple of years mortgage rates rose to 4.9%, but in the past couple of months as the Fed has pledged to refrain from any further rate increases at least until midyear and as inflation has remained in check, the 30-year mortgage rate has fallen to 4.4%.  That should bolster the housing market as we move into the spring.

Finally, consumers have paid down a ton of debt and debt to income ratios are very low.  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 should rebound in the months ahead.  We continue to expect GDP growth to rise 2.7% in 2019 after having climbed 3.1% last year.

Stephen Slifer


Charleston, SC

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