A January Thaw For Retail Sales

Retail sales rose 0.4% last month, the government reports. That’s below what many economists were forecasting, but predictions aside there’s nothing particularly troubling with the latest numbers. Indeed, the revival in January’s retail sales growth after December’s sluggish pace is welcome news.

But there’s always something to worry about, of course, especially these days, and one potential dark cloud is the slowdown in the year-over-year trend in consumption. Granted, the annual rise in retail sales is still quite robust, but it continues to decelerate. On the other hand, looking at January’s numbers suggests that the American consumer remains willing and able to buy. If we consider the latest retail sales update with other economic reports of late—the surge in transport activity, for instance, as Ed Yardeni notes—the case for expecting moderate economic growth in the foreseeable future remains intact, or at least plausible. That said, the ongoing descent in the rate of annual growth in retail sales, which mirrors the slowdown in disposable personal income growth, is worrisome, if only at the margins at this stage.

As for last month’s retail sales, consumption rose 0.4% on a seasonally adjusted basis, the best month since last October. Meantime, after excluding the volatile auto sector, retail sales were up in January by a healthy 0.7%–the strongest month for retail ex-auto since last March.

More importantly, the annual pace of retail sales overall continues to rise on a year-over-year basis by a robust 5.8% as of last month. If the annual rate stayed in this neighborhood, we could rest easy. But there’s reason to wonder how the months ahead will play out for consumption. Indeed, the annual rate of growth has been slipping for four months straight and we’re well below the 9% pace from a year ago. True, deceleration was always fate from the high levels in the recent past. A mature economy like the U.S. can’t maintain retail sales growth above 7% for very long. The question is whether the trend will continue to sink? The decline in the personal income growth rate raises some doubts about what comes next, although the ongoing strength in the labor market keeps hope alive.
Indeed, if there’s an argument for thinking that the slowdown in the annual growth rates of consumption and income will soon stabilize, the optimism is directly related to the economy’s ability to mint new jobs at a reasonably healthy pace. So far, so good, as the latest nonfarm payrolls report suggests, supported by the ongoing decline in initial jobless claims. And if last month’s pop in retail sales is an indication, an argument in favor of the virtuous cycle rolling on is convincing.
“I don’t think there’s anything here [for retail sales] that really brings into question the fact that the economy has been improving,” Wayne Kaufman, chief market analyst at John Thomas Financial,tells Reuters. Pierre Ellis, an economist at Decision Economics, is inclined to agree. “The good news is that the strong January gain establishes that the consumer trend is not folding,” says Ellis via AP.