Retail Sales were weaker than expected in January. Total retail sales rose 0.3%, below the 0.5% consensus expectation, and are up 7.8% from a year ago. December was revised down from 0.6% growth to 0.5% growth.
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 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. Still, it is a pretty important thing to watch.
Auto sales were a bit of a help to overall retail sales in January, rising 0.5% on the month, that is after rising 1.5% in December. On a year-over-year basis they were up 15.7%. Excluding autos, retail sales rose 0.3%, matching the December rise, but only after the December number was revised down from a 0.5% gain.
Year over year, sales are up 6.2%. The consensus was looking for a 0.5% rise on the month, excluding autos.
Disappointing Report
This report has to be seen as a disappointment. Some of the weakness might have been weather-related, but, then again, the consensus forecasters all had access to the Weather Channel. The fact that it was a harsher than normal January was hardly a surprise. The year-over-year numbers are still pretty robust, so I would not want to overstate the weakness, but it was still a disappointment.
Autos
The growth was very uneven. The report tracks 13 major categories of stores, of which eight were up and only five down on the month. Year over year, twelve of the types of stores are showing increases, ranging from 0.6% (furniture stores) to 14.2% for auto dealers like CarMax (KMX). The auto numbers also include auto parts stores like AutoZone (AZO).
Electronics & Appliances
The only category of store showing a decline were the Electronics and Appliance stores, where sales were down 0.3% from a year ago. The retail sales data is adjusted for things like the season and the number of shopping days, but not for price changes. Electronics is one area where prices routinely fall.
Non-Store Retail
Excluding the car lots, the highest year over year growth (13.5%) was in the non-store retailers, the category that includes the likes of Amazon.com (AMZN). Again, the numbers are adjusted for things like the number of selling days in the month but not for prices, and thus give more of a picture of what is happening with nominal GDP than real GDP.
Gas Stations
The lack of adjustment for price changes means that sometimes increases really are not good news. Most notably the case of gas stations. Their sales surged 1.4% on the month, and are up 12.0% from a year ago. The increase in January was on top of a increase of 1.8% in December. Clearly that is mostly a function of higher gasoline prices than it is a sudden surge in the consumption 44 oz fountain soft drinks and hot dogs off the rollers.
The price of oil has recently fallen back a bit as the situation in Egypt has stabilized, but so far that has not really filtered down to the prices at the pump. I suspect that the rate of increase will moderate in the February report.
Grocery Stores
Grocery store sales rose 1.3% in January, but that was after a 0.7% decline in December. That could be a bit of an indication of food price inflation. Certainly food commodity prices are way up, but raw commodities make up a pretty small part of the nation’s shopping cart. The price of wheat is a very small part of the cost of a loaf of bread, for example.
Relative to last year, sales are up 4.3%. Food price inflation has not been a big long-term problem, at least here in the U.S., but it does seem to be picking up and might be more of a problem looking forward. In other parts of the world, higher food prices are a serious problem, and many analysts have pointed to higher food costs as one of the key sparks to the unrest in Tunisia and Egypt (which does seem to be spreading to other parts of Northern Africa and the Middle East).
Drug Stores
Drug stores like Walgreen’s (WAG) also had a pretty good month with sales up 0.5%, but that is down from a rise of 0.7% rise in December, and up 6.4% year over year.
Other Discretionary
The more discretionary types of stores were mostly on the soft side. Sales at Furniture stores fell by 0.3%, after showing no increase in October. They are up just 0.9% year over year. Historically, one of the biggest catalysts for buying new furniture has been when people move to a new house. With sales of both new and used homes in the doldrums this has meant lower sales for furniture stores. Also, a new couch has to be one of the easiest purchases to defer if a consumer is not confident about their future or does not have cash available.
Sales at Electronics and Appliance stores such as Best Buy (BBY) rose by 0.3% on the month after having fallen 0.9% in December. As I noted above, it is the only category of stores where sales were below year-ago levels.
The appliance side of those stores suffers from the same problem as the furniture stores — low housing sales. And in electronics’ case, so some of the weakness is probably due to prices falling rather than volume.
Sporting Goods and Hobby stores also saw weak sales, with a decline of 1.3% on top of 0.2% drop in December and up 3.0% year over year.
Sales at Building Materials and Garden Center stores such as Home Depot (HD) tumbled 2.9% in January, more than reversing a 1.8% rise in December. This is one area where the harsh weather is a plausible reason for the weak sales on the month. On a year over year basis, the category is fairly strong, up 8.7%.
Given how weak the construction industry has been, up 8.7% from a year ago is a very strong showing, but then again, a year ago things were pretty depressed. It may also be that people are spending more to spruce up their existing place rather than move into new homes.
Apparel & General Merchandise
Clothing stores like The Gap (GPS) also had a soft sales month, with sales down 0.3% on top of a 1.4% fall in December. Relative to a year ago they are up 3.4%. A new pair of jeans is a bit less discretionary than a new kitchen table, but more discretionary than going to the grocery store. Some of that weakness, but not all of it, might be a simple shift in market share.
General Merchandise stores, a category that includes department stores, saw a 0.8% increase on the month, but that was after a 0.9% decline in December. Year over year, General Merchandise sales are up 3.1%, so in the longer-term view it does not look like it is just a case of people buying more of their clothes from the mall anchors like Macy’s (M) rather than the stores in the mall periphery.
Bars & Restaurants
Going out to eat and drink is also a very discretionary item, and sales at bars and restaurants were down 0.7%, after a dip of 0.2% in December and are up 3.3% year over year.
Discouraging Overall
Overall this is a discouraging report, especially considering the downward revisions to last month’s numbers. The strength was mostly in areas where the higher numbers were likely due to higher prices, not higher volumes.
Higher sales at gas stations is not what we are looking for, ditto for grocery stores. What it looks like to me is more of a divergence between headline prices and core prices, not big increases in volumes. We will see if that is the case on Thursday when the CPI comes out.
It shows that despite what we have seen in the consumer confidence surveys, that consumers are actually acting much more conservatively. They are spending on the things they need from day to day, but are holding off on some of the big-ticket discretionary-type items.
That is one of the reasons that the consumer confidence numbers are probably the most overrated economic indicators around. You have to look at what consumers do, not what they say, and the two are often different. It is actual sales that count, not what consumers say they are going to spend.
This report suggests that consumer spending will be a smaller contributor to GDP growth in the first quarter. However I would not read too much into it. January is a much less important month for overall retail sales than is December.
While the data is seasonally adjusted, the seasonal adjustments are based on an average winter, and this winter has been much harsher than normal. A blizzard does make it harder to get to the stores. Generally, declines in sales due to bad weather are merely deferred, not eliminated, and more often than not the deferral is made up in the same month. The make up might not have happened in January this time, though, given the scale of the winter storms.
That will make the February Retail sales report more significant than usual. If it really was about the weather, then we should have a very strong February report. Until then, one would have to see this report as a yellow flag (but not a red one). Either way, there does not seem to be a good way to dye this flag green.
Longer-Term View
The graph below (from this source) 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 back to new highs, but only slightly above the pre-recession highs. 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.
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