August 14, 2012
A Surprisingly Strong Retail Sales Report For July
If July is supposed to be the tipping point, when the business cycle succumbs to gravity, it's not obvious in today's update on retail sales. Spending rebounded strongly last month, the U.S. Census Bureau reports. The advance estimate of U.S. retail and food services sales for July, seasonally adjusted, popped 0.8%. That's the highest monthly gain since February's 1% surge. Economists generally were projecting a gain of roughly 0.3%, Bloomberg notes.
One month doesn't tell us much, of course. Still, it's worth noting that July's handsome revival is a break with the monthly declines of late. It's anyone's guess if this is a positive sign for consumer spending in the near term vs. a one-time event, but it's a lot easier to ponder the brighter possibility in light of today's numbers.
More importantly, the year-over-year percentage change in retail sales turned higher in July--for the first in five months. It's premature to say that the long deceleration in the annual rate of growth for retail sales has stabilized, but here again the thought resonates a bit stronger with the July update.
Today's news reminds once more that the rush to assume that a recession is near—or that another downturn has already started—looks impulsive. Forecasting the next move in the economy, in other words, is hazardous work. But judging the trend according to the numbers in hand remains a relatively transparent affair. Indeed, as I've been noting on these pages for some time, reviewing a broad set of the numbers in terms of their trend (i.e., mainly looking at year-over-year changes) still leaves plenty of doubt for expecting the worst. Tomorrow may tell us differently, of course, but let's not confuse that exercise (productive as it may be) with dissecting what we know currently.
On that note, how does the brighter reading on retail sales for July compare with a broad sampling of other economic and financial indicators that provide useful clues for assessing the business cycle? The short answer: the better-than-expected news today fits right in with a generally encouraging profile writ large.
For a more precise answer, let's start with the current estimate of the Capital Spectator Recession Risk Index (CSRRI), which is a simple diffusion index that tracks the percentage of indicators trending positive each month, and averaging each reading based on the trailing 3 months. As the next chart shows, CSRRI remains in the 80% to 90% range, based on the latest numbers--i.e, the majority of indicators are trending positive. The July reading of 83.8% implies that the odds are low that last month marked the start of a new recession. History suggests that a new recession will begin once this index is falling persistently and dives under 50%. For the moment, we're nowhere near that danger zone, using the data published to date.
Here's a closer look at the recent histories of the individual components used in calculating CSRRI:
Although we're missing several pieces of July's data profile, today's retail sales suggests that the upcoming personal spending update for last month (via the Bureau of Economic Analysis) will remain firmly in the black in terms of its year-over-year percentage change.
Nonetheless, no one should underestimate the risks that hang over the U.S. or the global economy. As such, CSRRI shouldn't be confused with a forecast. Instead, it's a reading on the numbers so far--a "nowcast" of recent history. That's hardly the last word on evaluating the business cycle or deciding if the economy's friendly or not, but it's a solid start.
Perhaps it's fair to say that the pessimists have some explaining to do. At the very least, they'll have to wait until the August data arrives for asserting that the end of the expansion is near (or here). Yes, the future may be turn out to be ugly. For now, however, cautious optimism rolls on.
Posted by jp at August 14, 2012 9:58 AM