Retail and Food Service Sales were up 0.5% in July, in line with expectations. June was revised up from an increase of 0.1% to an increase of 0.3%. Total retail sales are up 8.5% from a year ago. In other words, reports of the consumer’s death have been greatly exaggerated.
The Retail Sales report covers far more than just the shopping malls, and is a very broad-based measure of consumer spending. Since consumer spending makes up 70% 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. Still, it is a pretty important thing to watch.
A Breakdown of Results
Auto (and parts) sales were up 0.4%, down from a 0.7% gain in June (revised down from a 0.8% increase). On a year-over-year basis they were up a solid 8.1%. That figure includes sales at parts dealers like AutoZone (AZO) as well as the dealers like CarMax (KMX).
Excluding autos, retail sales were up 0.5%, nicely ahead of expectations for just a 0.2% increase. Year-over-year sales are up 8.6%. 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. However, outside of food and energy, inflation is very tame on a year-over-year basis.
The growth was widespread. Of the thirteen types of stores tracked in the report, ten were up on a month-to-month basis, with only two down and one unchanged. Sales rebounded a bit in many of the more discretionary types of retail sales.
Last month, before the revisions, eight were up and five down on the month; after the revisions, nine were up and only three were down. Year over year, all types of stores are showing increases, ranging from 0.4% (Electronics and Appliance stores) to 23.6% 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 slightly in response to higher prices, and moves to increase the fuel efficiency of the country’s auto fleet.
The Best Performers
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 the catalog and internet retailers like Amazon (AMZN). They are up 14.1% year over year. As noted above, the Auto Dealers and Parts stores were up 8.1% year over year. Miscellaneous stores sales are up 9.4% year over year.
The best performers on the month were the gas stations, where sales rebounded 1.6%, reversing a 1.7% slide (revised from a 1.3% decline) in June. Falling revenues at gas stations is a bad sign, not a good one. Given the recent sharp decline in oil prices, we should expect gas station sales to be down in August. Money not spent at the pump can be spent elsewhere, and much of the cash spent on gasoline flows abroad, rather than re-circulating in the economy, to pay for oil imports.
The other part of non-core inflation, food, showed an increase of 0.5%, matching its June increase, but only after June was revised up from 0.3%. Sales at Grocery Stores (and other stores selling food and beverages, excluding restaurants) jumped by 7.8% year over year. Sales of food for the home are among the least discretionary purchases, along with gasoline.
Spending at Health Care stores, such as Walgreen’s (WAG) also tends to be relatively stable. Sales there were up just 0.1% in July, after being unchanged in June. June, however, was originally reported as a decline of 0.2% on the month. Sales are up 4.1% year over year.
Discretionary Sales Up
Perhaps the most encouraging sign is in the highly discretionary types of retail sales. They took it on the chin in June and to a lesser extent in May, but are showing signs of rebounding.
Sales at Electronics and Appliance stores are a good example. They jumped 1.4% on the month, but that is on the heels of a 0.1% decline (revised from -0.2%) in June. Still, year over year, sales are effectively flat, up just 0.4%. However, on the electronics side of things, prices generally decline over time, so the situation is a bit of the flip-side of what is going on at the gas stations (year over year).
As for appliance sales, they tend to be spurred by housing sales, both new and existing, and both of those have been soft. Furniture sales are also greatly influenced by home sales. People tend to redecorate when they move into a “new for them” house.
Absent that, there are few purchases that are generally easier to put off until next month or next year than a new sofa or dining room table. Furniture sales were up 0.5% in July, reversing a 0.5% decline in June (revised from a 0.8% decline). As with electronics, the year-over-year increase is anemic, up just 1.1%.
On the other hand, another discretionary category — Sporting Goods and Hobby stores — saw sales fall, with a drop of 1.5%. Last month was revised sharply upwards there to an increase of 0.2%, not a 0.7% drop. Year over year sales are up just 2.9%. This category also includes book stores, so the bankruptcy and liquidation of Borders may be distorting the numbers in this group.
Longer term though, the switch to electronic book sales, such as on the iPad or the Amazon Kindle, pose a secular and existential treat to the book store category. Those electronic sales are mostly made by firms in the non-store retailing category. Those on-line retailers have been one of the bright spots in retailing, rising 0.9% for the month on top of a 0.4% rise in June (revised from 0.3%) and are up 14.1% from a year ago.
Clothing stores like The Gap (GPS) showed solid growth, but slower than in June. They saw sales increase 0.5% in July, down from a 1.2% increase in June. However, June was revised sharply higher from the original 0.7% increase reported. Relative to a year ago they are up 7.7%, which is a bit 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 no change in July, after rising 0.5% in June. Year over year, General Merchandise sales are up 3.7%, so sales are generally on the soft side at the mall anchors than in 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 just 0.1% in July, but June showed a big upward revision, swinging to a 0.4% increase from a 0.4% decline reported last month. Year over year sales are up 5.6%.
Welcome Good News
Overall, I have to call this a strong report. Not so much for the absolute increase in July — it was OK, but not superlative. The good news was in the upward revisions to June and the better performance of some of the more discretionary types of stores. The overall number was in line with expectations, but sales excluding Autos were much better than expected.
The more discretionary mix was a surprise, especially in light of soft consumer confidence numbers and the soap opera that was going on in D.C. during the month. Keep in mind that these numbers are not adjusted for inflation, but inflation is low and likely to remain low.
The bond market is crystal clear on its view that inflation will remain low. Bond market investors, who tend to be pretty sophisticated types, are willing to lock up their money for ten years at a yield of less than 2.2%. They would have to be blithering idiots to do that if they expected inflation to seriously start to accelerate. If inflation were to average more than 2.2% for the next decade those bonds would be certificates of confiscation, not investments.
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 — than 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.
This report is decidedly not supportive of the idea that we have already started to fall back into recession. That is highly significant because after the recent tumble in the market, it looks like the market is pricing in a recession. This report should give investors confidence to at least nibble on solid, safe firms. I don’t think it is a green light for highly speculative investments, but it is for big, well-capitalized dividend paying stocks.
The second graph shows the year-over-year change in sales excluding gasoline going back to 1993. While the year-over-year gain of 6.9% is down from the 8.2% pace at the start of the year, 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 lower 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 healthy, at least on a year-over-year basis. 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.
AMAZON.COM INC (AMZN): Free Stock Analysis Report
AUTOZONE INC (AZO): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
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