A Patchy Week Ends … Patchily

Well we really do have a case of the winter blues. Two reports are worth talking about today: retail sales, which showed some growth; and consumer sentiment which faded away a little. The net effect? Smartly sideways.

First retail sales.

After December’s poor showing, we needed a little lift in January which is exactly what we received. Sales rose 0.5%, and both the November and December numbers were revised upward somewhat. There is no way we can characterize this slight growth as being strong, although I am sure we will read such phraseology in the financial media. The rebound from December was larger than expected so there will be a sense of optimism floating around the usual Wall Street rooting sections. But, as usual, I want to inject an air of caution: much of the increase was in gasoline expenditure and therefore is not necessarily a sign that consumers are out and about willing to spend on more discretionary items. Right now the emphasis seems to remain on buying necessities, and only those discretionary items being offered at steep discounts. In other words we are in a similar pattern to that of late last year.

Overall retail sales grew 4.7% last year, which is decent, but not great. We all need to keep an eye on how consumers spend in the current quarter because we will then gain better insight into the sustainability of this recovery. Mort pundits are looking for retail sales of between 2.0% and 2.5% for the quarter. That would be barley sufficient to move overall consumption by the same amount, and would be flat from the last quarter. If this works out to be an accurate estimate then any hopes of the much discussed “V” shaped recovery can be forgotten.

And the news that consumer sentiment dropped seems to justify such an opinion.

The problem with the consumer sentiment figures published every month by the University of Michigan is that they do not have a tight correlation with actual subsequent spending. Obviously consumers may report that they are wildly optimistic and then not spend; or they may be gloomy, but still spend. So we take such attitudinal surveys with a very large grain of salt.

Having said that, what do we make of today’s very split data? When asked about the current conditions, consumers seemed to be more optimistic than recently: the current sentiment index rose from 81.1 in January to 84.1 in February. Evidently people are feeling better at the moment, which may help explain the slight pick up in retail sales I just mentioned.

But, the same people give a very different view of the medium term. The index for that fell a little from 74.4 to 73.7. It is not unusual for people to report a less optimistic view of the future, the inherent uncertainty of taking a view across time seems to guarantee some hesitancy, but at turning points in economic cycles should be an exception to that rule. We should be seeing a building confidence about the medium term as the recovery takes hold. Clearly this is not the case at the moment. As a result we may see consumption or investment in longer term, more expensive, luxury or durable goods flatten out as people hoard cash rather than spend it. This would crimp consumption just as we need it to expand.

What do we make of these two reports?

The recovery is a long way from being sustainable and there appear to be plenty of households who remain fearful about the future. Wall Street analysts may be convinced about the reality of recovery, but Main Street is a whole lot more skeptical. Since it is the latter we need to get out and spend I have to conclude that today’s evidence reinforces the view that growth will be patchy and on the weak side.

Unfortunately all the risks remain on the downside as we trudge deeper into 2010.