Any one economic indicator is suspect as a measure of the broad trend, but the updates arrive one at a time and so we must take ‘em as we get ‘em. Taking this morning’s retail sales report at face value suggests that the recession talk of late is premature. Retail purchases rose sharply last month, gaining 1.1% on a seasonally adjusted basis over August. That’s the best month for retail sales since February. Recession where is thy sting?
“It’s a strong performance,” says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “Retailers are in good position to profit from the holiday season.”
It’s true that a big chunk of last month’s surge is due to auto sales. But excluding motor vehicle and parts dealers from the equation still leaves retail sales up by a healthy 0.6% last month. Proclaiming hard-and-fast rules in the dismal science is dangerous, but let’s dispense with that caveat for a moment and state what’s on everyone’s minds this morning: It’s hard to argue there’s a recession under our noses in the face of robust consumption gains.
One month doesn’t make a trend, even a particularly strong month. But reviewing the 12-month rolling percentage change in retail sales doesn’t change the rosy glow that emanates from today’s update. September retail sales are higher by nearly 8% vs. the year-ago figure. For a mature economy the size of the U.S., that’s about as good as it gets. Is the strong annual pace a fluke? If it is, it’s a fluke that’s been unfolding for the better part of the last two years, as the chart below reminds.
The case for thinking there’s a recession near, or that one has already begun, looks weak if not laughable based on today’s retail sales report. Or have we hit a new strain of economic contraction that has no immediate effects on consumption? Never say never in economics, but I’d label that scenario as highly unlikely. History suggests that we’d see some deterioration in retail sales concurrently with the arrival of a new recession. As such, the evidence suggests we should be cautious in anticipating an outright contraction in GDP.
“It looks like third-quarter GDP is going to be better than the first and second quarter combined,” advises John Canally, an investment strategist and economist for LPL Financial.
Then again, no one will confuse the current state of macro as healthy. The familiar troubles are still here, starting with the weak pace of job creation. But modest growth isn’t a recession, even if it feels like one.
Today’s retail sales report might be dismissed if there was no other supporting evidence of sluggish but sustained economic growth. But we have a number of recent updates that tell us the economy will muddle along. The ongoing if modest pace of job growth, for instance.
Can we be absolutely sure that a recession isn’t upon us? Alas, no. Such definitive statements in matters of the business cycle can only be made with the benefit of hindsight. What we can say with confidence is that if there’s a downturn brewing we’ll see some evidence in slowing retail sales. The same is true for the trend in job creation, industrial production, and other crucial metrics. But there’s no conspicuous decline in the broad numbers on several fronts. That’s the basis for optimism. It’s an optimism that comes with some baggage, of course. And the outlook could change, perhaps quickly. That’s a risk for a precarious recovery. For the moment, however, the expansion looks slightly less wobbly.