Retail sales fell a modest 0.2% last month on a seasonally adjusted basis, the Census Bureau reports. That’s the first monthly decline in nearly a year. Given the recent weakness in several economic reports, no one needs an excuse to see today’s retail sales news as a sign of trouble ahead. Fair enough, although there’s still room for debate. As troubling as the number du jour is, the broader context for retail sales remains quite positive. That may or may not be decisive, but it’s something.

As the chart below shows, the 12-month trend in retail sales remains robust through May, advancing nearly 8% on a seasonally adjusted basis. That’s higher than during the boom years just before it all came crashing down in the Great Recession. If there’s a new recession approaching, it’s not obvious in the annual pace of retail sales.
There’s no law that says the rolling 12-month percentage change in retail sales will offer an early sign of a downturn in the business cycle. Nonetheless, history suggests that this measure is likely to suffer a rapid decline in the early stages of a new recession. For the moment, at least, there’s no sign of such stress in the annual rate of change, which filters out a fair amount of noise in the month numbers.

But parsing the data in the months ahead is going to be tricky. The retail sales growth rate on a year-over-year basis is destined to slow, falling to something approaching a “normal” level of expansion, assuming the economy muddles through the latest soft patch. The question is how much it slows, and how fast? Based on the latest data, the slowdown is gradual…so far. That may change in the months ahead, of course, but there’s no sign of it yet.
Even if we look at the more sensitive measure of real (inflation-adjusted) retail sales on a year-over-year basis, the growth rate looks encouraging. We can also review various adjusted measures of retail sales for additional clues. For instance, retail sales excluding the volatile auto sector, but here too the annual pace is still strong, rising 5.4% over the past year. Another perspective is looking at retail sales less gasoline purchases, but once again there’s no obvious sign of danger. By this measure, consumption ex-gasoline is up around 6% vs. the year-earlier period, or just moderately below the 7%-to-8% peak for the cycle reached a few months earlier.
“Consumers are hanging in, given the headwinds,” Omair Sharif, an economist at RBS Securities, told Bloomberg before this morning’s report was released. “Some of the temporary factors will fade in the second half. Consumers are in a position to add to economic growth though at a very moderate pace.”
He may or may not be right, but it’s not easy to dismiss Sharif’s view based solely on today’s retail sales news. But one data series alone can only tell you so much, if anything. Context is important. Let’s see what tomorrow’s update on industrial production reveals. The consensus forecast is a slight gain of 0.2% for May industrial production, up from April’s unchanged report. Stay tuned…