Wednesday, 17 of October of 2018

Economics. Explained.  

Retail Sales

October 15, 2018

Retail sales rose 0.1% in both August and September after having risen 0.6% in July.  However, Hurricane Florence blasted the North Carolina coast and parts of South Carolina in that month.  It is not too surprising that sales got dinged.  In October we will have some rebound from Hurricane Florence, but then Hurricane Michael slammed the Florida panhandle.  While these weather events can subdue sales in the months they occur, they do not change the longer-run picture.  As nearly as we can tell, sales still seem solid but it will take us several more months to get a clean read on the true pace of sales.  Over the  past year retail sales have risen 4.7%.

Sometimes sales can be distorted by changes in autos and gasoline which tend to be quite volatile.  In this particular instance car sales rose 0.8% in September, but gasoline sales fell 0.8%.  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 were unchanged in September after having risen 0.1% in August and having jumped 0.8% in July.   In the last year retail sales excluding cars and gasoline have risen a solid 5.0%.

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 stores have risen 3.4% in the past year, on-line sales have risen 10.8%.  As a result, their share of total sales has been rising steadily and now stands at a record 11.4% 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, all measures of consumer confidence are at their highest levels in a decade.

One of the reasons consumers are feeling so positive is that the stock market is still near a record high.  That increase in stock prices boosts consumer net worth.  Given that the economic fundamentals seem so solid, we conclude that the early October drop-off reflects nothing more than normal stock market gyrations rather than being an earlier indicator of slower growth ahead.

As long as the economy continues to crank out 200 thousand jobs a month, consumer income will continue to climb.

Real disposable income is currently climbing at a solid 2.9% pace which is somewhat higher than its 25-year average growth of 2.7%.

If the Fed keeps raising rates very slowly consumers will be able to continue to borrow at a reasonable rate.  At 4.9% mortgage rates are well below the 6.25% average over the past 25 years.

In addition, 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 seems steady.  We continue to expect GDP growth to quicken from 2.5% last year to 3.1% this year.

Stephen Slifer


Charleston, SC

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