October 15, 2008
THE BIG FADE ON SPENDING ROLLS ON
This morning's retail sales report will surprise no one who's been watching the economy this year, but the trend is still disturbing.
Estimated monthly sales for retail and food services on a seasonally adjusted basis slumped 1.2% last month, the biggest monthly percentage decline in more than three years, the U.S. Census Bureau reports. On a 12-month basis, retail sales are 1% below the year-ago figures. As our chart below reminds, the trend looks ugly, and it's virtually certain that there's more of the same and worse on tap for the coming months.
Considering the U.S. economy's high dependence on consumer spending (roughly 70% of GDP comes from personal consumption expenditures), today's retail numbers speak loud and clear that the recession is here, and it probably has been for some weeks or month, and that the general economic downturn will deepen for the remainder of the year and quite possibly continue through early next year. Your editor was at a press conference with money managers in New York yesterday and one especially pessimistic chap talked of quarterly GDP falling by an annualized 5% at some point in this year's second half. We're not sure the pain will get that bad, but one can't rule out much these days in light of all the negative surprises in recent weeks.
The bright side of all this, if we can call it that, is that inflation for the moment is in hibernation. Again, no surprise there, at least not since last month, and for some the epiphany came a lot earlier. Yours truly, however, was a bit late to the party. But better late than never. We've been worrying about inflation for some time, and we're still convinced that eventually this beast will return as a threat of some distinction, given all the liquidity that's been pumped into the global economy. But the magnitude of the economic and financial ills recently convinced us to reconsider the threat in the short term and we said as much a month ago.
Today's wholesale price report for September only lends more support to this view. Producer prices last month fell 0.4%, following a 0.9% drop in August, the Labor Department advises. Core PPI is still bubbling, posting a 0.4% rise in September, although we expect that too will moderate if not turn negative in the months to come.
A whiff of disinflation that could turn into a mild if temporary deflation is in the air. So it goes with all the economic and financial unwinding these days.
Unfortunately, the bad news for Main Street economics has only just begun. It's unclear where exactly we're headed and how much damage the economy will suffer. It's still far too early to venture a guess other than to expect a hefty storm. No, it's not the end of the world, but the Great Moderation, like so many other rosy assumptions that took root over the past generation, is set for a major revaluation. Recessions of some magnitude, in sum, only appeared to be a thing of the past.
Posted by jp at October 15, 2008 9:40 AM
Yes, there is typically a fall in Sep retail sales from Aug in unadjusted terms and so the suggestion that last month was out of the ordinary was misleading on our part. That said, sometimes the ordinary turns problematic when the broader context changes, as it so radically has of late.
The fact that retail sales, in both adjusted and unadjusted terms, are falling may not be inherently troubling in any given month unless we know what's going on in the broader economy. Given the context of late, a monthly decline in retail sales isn't just another decline. At this point in the cycle, no one will take comfort from learning that retail sales on an unadjusted basis tend to go down this time of year. Yes, that's important to know and we failed to mention the context. But such distinctions don't have much value at the moment because of the excess of fear and caution throbbing through the economy and financial markets.
For the record, the tendency for unadjusted declines in September retail sales should be put in a longer historical context for relative comparisons. The unadjusted 8.51% drop last month is comfortably in the upper range of the negative numbers for the past 10 years. Since 1992, the average unadjusted drop in Sep retail sales is -6.3%, with a range of -3.2% up to 11.1%.
Ultimately, the point about unadjusted declines in sales last month wasn't the basis for our general bearish outlook on this data series. Rather, it was just another data point to consider, albeit one we failed to put into proper historical context. As such, we've removed the offending passage. Twenty lashes for this editor.
Fundamentally, our outlook is unaffected by our stumble on unadjusted Sep trends. More compelling to us is the longer trend in seasonally adjusted retail sales, as our chart shows. On that basis our view still stands.
Posted by: JP at October 16, 2008 10:45 AM
"The report gets uglier the closer you look. Save for spending at gasoline and health/personal care retailers, every major category of retailing fell last month vs. August."
And if you had bothered to compare this to history, you might have found that this happens EVERY YEAR. In fact, last year EVERY major category was down from August to September, and overall retail spending was down more (8.84% v. 8.51%).
Stop jumping to conclusions before doing any meaningful research.
Posted by: BS Detector at October 15, 2008 11:33 AM