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Retail Sales fell by 0.3% in October (month to month) but were up 3.8% annually (versus 5.4% in September), according to the Commerce Department’s September Advance Retail Sales Report. Those are seasonally adjusted idealised estimates. Neither figure is adjusted for inflation. The median forecast of economists was for a monthly decline of 0.2%. The decline was blamed on Superstorm Sandy.Note: When analysing 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 year to year change in real retail sales, ex gasoline prices, and adjusted for inflation in October was a gain of 3.5%. It brings the gain back toward the mid range of annual growth rates that has been between +1.5% and +7.3% since March 2010.
This analysis uses not seasonally adjusted (NSA) data due to the inaccuracy and potentially misleading nature of seasonally adjusted data. In this context, historically, October is always an up month. This year’s gain was 3.3% month to month, which was better than the corresponding period of last year (+1.4%) and 2010 (+2.5%). It was also better than the 2002-2011 October average of +2.4%. The performance of retail sales in inflation adjusted terms, after backing out gasoline sales, was better than the headline numbers suggested.
A decline in gas prices gave consumers some relief from the rising price trend. Rising gas prices had been taking a toll on retail sales. Rising gas prices are a de facto tax on consumers that cause reduced consumption of other goods and services since demand for gasoline is relatively inelastic.
QE3 runs the risk of exacerbating the trend of rising gasoline prices, just as its predecessors did. But the Fed’s QE3 securities purchases had not yet started to settle in October and energy prices corrected. The first QE3 purchase settlements are on November 14. The impact of QE3 should be be seen in the months ahead as that cash flows into the financial markets. But for October at least, falling gas prices acted like a tax cut putting more income at consumers’s disposal for other retail spending.
The initial advance estimate is based on a small survey sample and is subject to revisions that could make the comparisons slightly more or less favourable 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 October reading will not be released until tomorrow (November 15). If CPI upticks from September, that would depress the real data. The PPI release for October however suggests a small decline in CPI, which would further boost the gain in real sales.
In the big picture, the current “recovery” has been weak relative to the past when “growth” was driven by seemingly endless expansion of debt.The real rate of growth has usually been in the vicinity of 2%-3.5% on average recently. 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.
Likewise, today’s unemployment rates are probably normal, and 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 in October that the Fed would continue QE even after employment improves. Other FOMC members have echoed that sentiment, particularly the idea that any tightening of policy should only be after an extended period of improvement in the unemployment rate. The misguided desire to get back to bubble unemployment rates is what is driving their panic.
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 recent decline in costs takes the pressure off temporarily. I believe that that decline was due to the fact that QE3 had not really started yet. The cash from the $40 billion a month in new Fed MBS purchases begins to flow now. The effects should be seen within a few months. Rising energy costs would then begin to depress retail sales again. Those two forces could lead to a vicious cycle of rising costs, reduced retail sales, and job cuts.
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