Another Zero For August Economic Activity

Retail sales last month were essentially unchanged, offering another sign that the economy has slowed. The flat performance mirrors the stagnation in jobs creation for August. Zero and zero add up to a discouraging outlook for the economy. Nonetheless, let’s be fair and recognize that the annual trend in retail sales still looks robust.

For the 12 months through August, retail sales climbed 7.2%. That’s in the range of the annual pace over the last year or so, and since a 7% rise over 12 months is historically a strong number there’s a case for thinking that there’s no capitulation in these numbers, at least not yet.

Nonetheless, it’s hard to overlook the slowdown in August. The flat performance is the worst monthly reading since May’s modest decline in retail sales.
“Consumers are being more cautious given all the economic headwinds,” Michael Feroli, chief U.S. economist at JPMorgan Chase, tells Bloomberg. “Policy makers have to be focused on growth because growth seems to have come close to stalling in August.”
“The consumer reacted to the debt ceiling, the downgrade and the equity market swoon by basically hunkering down and not spending,” according to Tom Porcelli, senior U.S. economist at RBC Capital Markets. “It was flat on the headline, but even more troubling for us is flat on the control number, which excludes gas, building and auto dealers. This is not a good sign for an economy that is struggling.”
But Eric Green, chief market economist at TD Securities, isn’t ready to throw in the towel just yet. “The consumption data along with a broad swath of economic data are all consistent with slow growth, but not recession,” he opines.
If he’s wrong, we’ll start to see a deterioration in the annual rate of change in retail sales. For the moment, consumption hasn’t succumbed by that standard.
Another approach to digging into the numbers in search of the true trend comes by way of economist Bernard Baumohl, who writes in his book The Secrets of Economic Indicators:

There’s a risk in relying too much on advance estimates of retail sales because they are based on a relatively small sampling. A more accurate sense of the underlying trend in consumer spending patterns can be discerned by monitoring sales on a three-month moving average basis or by looking at the last three months worth of data and comparing it with the same-three-month period the year before.

By that reasoning, there’s a statistical case for moderate optimism. Using the average of the three months through August, retails sales rose by roughly 8% from the year-earlier period. That’s quite a bit better than the near-5% gain for the 2010/2009 comparison. In fact, an 8% rise in the three-month average vs. its counterpart from a year earlier is near the highest pace in the last several years. Looking backward is no guarantee of what’s coming, of course, and one data series has limits for predicting changes for the overall economy. That said, the robust trend in retail sales remains intact, based on the numbers we have.
Let’s simply note that a 7%-8% annual rise in retail sales doesn’t jibe with a recession. The implication: either retail sales are set to drop a lot, or the recession risk is due to fall. Stay tuned for the answer…