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October 16, 2012

Retail Sales Signal Stock Market Bull Run Days Are Numbered

By Lee Adler of Wall Street Examiner
(via Ilene )

Retail Sales and Real Retail Sales Ex Gasoline – Click to enlarge Retail Sales rose by 1.1% in September (month to month) and 5.4% annually, according to the Commerce Department’s September Advance Retail Sales Report. Those are seasonally adjusted idealized estimates. Neither figure is adjusted for inflation. The median forecast of economists was for a gain of 0.7%. As usual, they had mostly extrapolated the prior month’s gain. And as usual, their forecast was wrong by a wide margin.

The year to year change in real retail sales, ex gasoline prices and adjusted for inflation in September was a decline of 1.3%. That’s down from a gain of 5.2% in August. It is also the first year to year decline since 2009. It broke the range of annual growth rates that has been between +0.1% and +7.6% since March 2010.

Note: When analyzing retail sales, I’m interested in the actual volume of sales, not the inflation skewed dollar total. To get to the kernel of the matter, I look at the real, not seasonally finagled retail sales, adjusted for top line CPI inflation (not core which normally understates the actual). Then I back out gasoline sales, which are a substantial portion of total retail sales. Gasoline sales distort total retail sales higher when gas prices are rising, when they actually act like a tax on disposable income and reduce non-gasoline sales. On the other hand, when gas prices fall, the top line total retail sales figure will understate any gains in the volume of sales. Gasoline sales typically account for around 12% of total retail sales. By subtracting gas sales and adjusting for inflation, the resulting number represents the actual volume of retail sales.

The question is whether this is a one-off or the start of a period of decline. Over the past 15 years, there was an instance in 2006 where the year to year change went this negative and then rebounded the following month, without resulting in a recession or a bear market in stocks. But in both 2000 and 2007 such negative readings corresponded with the onset of recession and bear markets.

Real Retail Sales 1998-2009  

This analysis uses not seasonally adjusted (NSA) data due to the inaccuracy and potentially misleading nature of seasonally adjusted data. In the context of the actual unadjusted data, historically September is always a down month. This year real sales ex gas fell by 7.8% month to month. That was much weaker than the corresponding period of last year (-1.0%) and 2010 (-4.8%). It was also slightly weaker than the 2002-2011 September average of -7%.

Rising gas prices are apparently taking a toll. Demand for gasoline is relatively inelastic. Rising gas prices are a de facto tax on consumers which therefore cause reduced consumption of other goods and services. With gas prices already at crushing levels, QE3 runs the risk of exacerbating the trend of rising gasoline prices, putting even more pressure on consumber pocketbooks.

The initial advance retail sales estimate is based on a small survey sample and is subject to revisions that could make the comparisons slightly more or less favorable when the final estimates are in but the revisions are normally not material. The calculation of “real” sales is also dependent on last month’s CPI reading, since the September reading will not be released until tomorrow (October 15). If CPI upticks from August, that will further depress the real data. The PPI release for September suggests that CPI will be up.

In the big picture, the current “recovery” was weak relative to the past when “growth” was driven by seemingly endless expansion of debt. Prior to this month, the real rate of growth had been in the vicinity of 2%-3.5% on average. In a more balanced economy not driven by growing debt, in a nation where population is growing at slightly less than 1%, that is probably the best the can be expected. The current break suggests that if the rise in gasoline (and food) prices is not reversed, even that growth rate cannot be sustained.

Likewise, today’s unemployment rates are probably normal, not cyclically elevated as the Fed seems to think. The Fed thinks the ultra low bubble unemployment rates of 5.5 to 6% are normal. NY Fed President Bill Dudley reiterated in a speech today that the Fed would continue QE even after employment improves. The misguided desire to get back to bubble unemployment rates is what is driving their panic. But past rounds of QE suggests that this one will result in the unintended consequences of a cost squeeze on business profits and inflation pressure on middle income consumers that could choke off the recovery in a few months. The drop in real retail sales in September may be the first evidence of that. The top 10% would have to massively increase their spending to offset the drop in spending by the 90%. In September, that did not happen.
Finally, if this isn’t just a flash in the pan, the days of the bull run in stocks are probably numbered. I would view any rally from this point forward with caution.

Courtesy Lee Adler of Wall Street Examiner and Illene at Market Shadows (http://s.tt/1q7b5)

  The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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