December 14, 2006
RETAILING'S BIG SURPRISE
In theory, one economic release has marginal relevance. But as yesterday's news on retail sales for November reminds, sometimes theory gets trampled under the rush to embrace the number du jour, particularly when there's a big upside surprise making the rounds.
The consensus outlook for retail sales last month was a meager rise of 0.1%. The actual number was a startling 1.0% surge, the Census Bureau reported. Such a hefty surprise comes at just the right time for anxious investors who are told by some that the economy will slow considerably next year. But after yesterday's news, is the notion of a slowing economy now officially dead?
One is tempted to answer a tentative "yes" after considering the latest retail numbers. As the chart below shows, consumers continue to spend across the board (gasoline station sales being the lone and not particularly relevant exception).
Do economic slowdowns really begin with robust consumer spending? Before we answer, it's instructive to consider the broader context for the latest retail numbers. Yes, a 1% jump in retail sales is impressive, particularly at this point in the economic cycle. What's more, retail sales have advanced 5.3% through last month from the year-earlier month.
But before we conclude that all's well, now's a good time to point out that retail sales, by last count, are growing faster than the economy--and by more than a little. Third-quarter GDP rose at an annualized real pace of 2.2%. Even the current-dollar GDP is only growing at 4.0%. Retail sales, meanwhile, are chugging ahead at an annual pace of 5.3%. How long can that last?
In the short term, we wouldn't venture a guess. That said, the spread noted above implies that either the economy's about to perk up or retail sales will continue to soften. Soften? Yes, that's right: soften. As the chart below illustrates, the trend of late in retail sales is down.
How much retail sales soften is the question. And that will depend on a variety of other factors, ranging from interest rates to what additional fallout from real estate, if any, arrives next year.
Anything's possible in the 21st century, but that doesn't mean momentum's irrelevant.
Posted by jp at December 14, 2006 10:13 AM
Wouldn't retail purchases of imported goods explain the difference between GDP growth and retail sales? Obviously one must have income in order to spend, and GDP is supposed to measure income, but not consumer income alone. Right?
Posted by: Tom Graff at December 14, 2006 3:00 PM
What is the effect of the switch to a different methodology, starting with this report?
Posted by: dd at December 14, 2006 2:20 PM