Retail Sales were slightly below expectations for March. Total retail sales rose 0.4%, and are up 7.1% from a year ago. The consensus of forecasters was looking for a rise of 0.5%. However, February was revised up from 1.0% growth to 1.1% growth, which more or less offsets the miss.
The Retail Sales report covers far more than just the shopping malls; it is a very broad-based measure of consumer spending. Since consumer spending makes up 71% of the economy it is a very important number. That overstates things a bit since retail sales are mostly about the sale of goods, not services — and services make up two thirds of what consumers spend — but still, it is a pretty important thing to watch.
Auto Sales Drag
Auto sales were a bit of a drag on overall retail sales in March, falling 2.3% on the month, after rising 1.0% in January (revised down significantly from 2.3%). On a year-over-year basis they were up a solid 10.0%. Excluding autos, retail sales rose 0.8%, down from the February rise of 1.1%, but down only after a big upward revision from 0.7%. The rise was also slightly higher than the 0.7% gain expected, but combined with the upward revision, it amounts to a major positive surprise.
Year over year sales are up 6.5%. The year over year numbers are pretty robust, but keep in mind that these numbers are not adjusted for price changes, so part of the year-over-year gains simply reflect inflation.
Growth Widespread, but Uneven
The growth was uneven, but generally widespread. The report tracks 13 major categories of stores, of which ten were up and only three down on the month. Year over year, all types of store are showing increases, ranging from 2.5% (General Merchandise stores) to 16.7% for Gas Stations. Clearly, gas prices were the major factor in the increased sales at the corner Exxon (XOM) station, not a sudden rise in the number of 44oz. fountain drinks being consumed. Actually, the evidence suggests that the volume of gasoline sold is actually declining in response to higher prices.
Aside from the Gas Stations, which are clearly a special case, the next strongest group on a year-over-year basis was the Non-Store Retailers — the group that includes catalog and Internet retailers like Amazon.com (AMZN). They are up 12.4% year over year. However, it looks like they are cooling off, actually down 0.3% on the month, reversing a 0.3% gain last month.
As noted above, the Auto stores were up 10.0% year over year, the third and last group to be up double digits year over year. That group includes not only the auto dealers like CarMax (KMX) but also the parts stores like AutoZone (AZO).
The monthly decline of 1.7% did not make the group the weakest, however. That dubious distinction goes to the Miscellaneous stores, where sales were down 2.1% on the month. Although that was on the heels of a very strong 3.1% rise last month, and year-over-year sales are up a solid 7.3%.
The best performers on the month were not the Gas Stations, but the Furniture Stores, where sales rose 3.6% for the month, after a 1.3% rise last month. This is a major turnaround for the likes of Ethan Allen (ETH). Even with the robust gains of the last two months, year over year sales are only up 2.7%.
I see this as a very encouraging sign. There are few purchases that are more easily postponed than getting a new dining room table. The recent pickup at the Furniture Stores is a sign of increased consumer confidence, and probably a more reliable one than the consumer confidence and sentiment surveys.
The tale of the Electronics and Appliance Stores tells a similar tale, up 2.1% for the month, on top of a 1.5% rise in February, but only up 2.9% year over year. Normally, both Furniture and Appliance sales are closely tied to existing home sales, but those have been weak of late, which makes the recent pop in sales there even more impressive.
The strength in the electronics side also has to do with the latest electronic gadgets, which tend to be unrelated to home sales. However, getting a new flat screen TV is also an easily deferrable purchase. It is worth noting here that prices for electronics tend to fall over time, so this is one area where the gains are not simply a reflection of inflation.
Building Materials stores like Home Depot (HD) also had a strong month, rising 2.2% on top of a 0.8% gain in February and are up 5.0% year over year. With housing starts and new home sales in the dumpster, this strength is not coming from small homebuilders. More likely it is coming from people fixing up the houses they are living in and which they plan to stay in.
U.S. Food Inflation Not Serious
With all the chatter about food inflation breaking out, one would expect to see a big pop in Grocery Store sales. That was not really the case, as sales were up 0.3% for the month, down from a 0.5% increase in February.
Year over year, sales were up 4.1%, well below the overall increase in retail sales. That is a bit of an indication that fears of food price inflation are a bit overblown, at least here in the U.S. Overseas they are literally a deadly serious problem, and are one of the sparks that ignited the unrest across the Middle East.
Certainly food commodity prices are way up, but raw commodities make up a pretty small part of the nations shopping cart. The price of wheat is a very small part of the cost of a loaf of bread, for example. Spending at the grocery store is about as non-discretionary as spending gets, and tends to be more stable than other retail sales.
Other Retailers
Spending at Health Care stores such as Walgreen’s (WAG) also tends to be relatively stable, but there was a big turnaround there as well, with sales up 0.7% after falling 0.5% the month before, and up 6.3% year over year.
Sporting Goods and Hobby stores saw sales slow, with a rise of just 0.1% down from a 2.8% surge in February. Year over year they are up 6.1%, which is a bit below average.
Clothing stores like The Gap (GPS) also had a slower sales month, with sales up 0.6%, down from a 1.8% rise last month. Relative to a year ago they are up 3.4%, which is decidedly below average. A new pair of jeans is a bit less discretionary than a new kitchen table, but less discretionary than going to the grocery store.
General Merchandise stores, a category that includes the Department stores, saw a 0.4% increase on the month, down from the January increase. Year over year, General Merchandise sales are up 2.5%, so sales are generally on the soft side at the mall anchors as well as the stores in the periphery of the mall.
Going out to eat and drink is also a very discretionary item, and sales at bars and restaurants were up a strong 1.0%, on top of a 1.8% increase in January. Year over year, sales are up 3.8%.
Encouraging Report Overall
Overall this is an encouraging report, not so much for the headline numbers for this month, but for the internals of the report, and the upward revision to last month’s figures once auto sales are stripped out. While the numbers for this month were anticipated, the upward revisions to last month’s numbers were not.
The retail sales report is at times very interesting when it shows a clear divergence between spending in discretionary spending items and on staple type stores. The more discretionary types of stores showed strong gains for the month, and increases in sales were widespread.
Autos were the exception. They are highly discretionary and had a weak month, but it is clear that Detroit is on the rebound (at least metaphorically — not so sure about the city itself). The year-over-year gains are still robust. The road ahead might get a little bumpy for a few months as the supply chain disruptions due to the Japanese disaster kick in. However, weak sales from a lack of product availability are a different thing than weak sales simply because the consumer cannot afford, or lacks the confidence to, buy a new car.
Going out to eat is also discretionary, and the bars and restaurants had a good month. The very discretionary furniture store category has seen a major turnaround in the last few months. The non-discretionary areas were OK but not spectacular, particularly if one averages the last two months together.
Thoughts on Inflation
I think the relatively tame increases at the grocery stores, both in recent months and year over year suggests that food price inflation is not as bad as many people have been suggesting. When food prices rise, people tend to cut back on other things, not go hungry.
The inflation at the gas stations, however, is all too real, and that is likely to bite into consumption of other goods in the near future if it keeps up. Worse, it seems to be accelerating — if the average of the last two months is annualized, it is running at 34.5%.
The graph below shows the longer-term path of retail sales, both total (blue line) and excluding sales at Gas Stations (red line). In both cases we are at new highs, but recall that these numbers are not adjusted for inflation. While inflation, particularly core inflation, is still very low, over the course of a few years it still plays a significant role.
The pace of growth since the bottom (slope of the lines) appears to be slightly better than what prevailed prior to the Great Recession, but it was not a very fast snap-back, more like a reset to a lower level, then a continuation of the previous growth rate from a lower level.
The ex-gasoline numbers are probably a better reflection of the overall state of the economy than the total numbers, but both are telling a pretty similar story. Things are getting better, but slowly.
The second graph shows the year-over-year change in sales excluding gasoline going back to 1993. While the year-over-year gain of 5.8% is down sharply from the 8.0% pace last month, it is still very healthy, and is higher than the increases that we were running for most of the previous economic expansion, and about on par with how we were doing for most of the Clinton economic expansion.
Core inflation was much higher than now in both of those previous expansions (these numbers strip out only the energy side, not the food side of the ex-food and energy inflation, so it is not a perfect match). That suggests that real retail sales outside of gasoline are very healthy. Then again, we are coming off the biggest downturn in spending in decades. That means there is a lot of pent-up demand out there.
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