Sales Point the Way

The stock market sagged at the sight of today’s retail sales report. The news was note as good as Wall Street had forecast, so stock prices had presumably anticipated something that didn’t exist. What a shock.

Coming out of the end of last year some forecasters had begun to hyper ventilate about 2012 being a breakout year. Sales, employment, production, and confidence were all moving in the right direction, and even the Fed was beginning to see healthier GDP prospects. This led to some folks getting a tad carried away and forecasting retail sales growth of about 1.0% in January. So the report of a mere 0.4% rise was something of a shock.

It ought not to have been.

Much of the rise at the end of last year was a typical late recession, early recovery, burst of ‘pent up demand’ for big ticket items such as cars. Look through the data and you see automobile sales being critical to the increase from fall onwards. In order to make those purchases households reversed their steady de-leveraging and ran up some extra debt. This was unlikely to be a sustainable trend, so sales were bound to level off. Which the January report shows they did.

It was only if you accept that the recovery was truly solid and that households had reached a comfortable debt to income level that you could then look to a period of robust sales. Even then incomes don’t provide any real help. Indeed stagnant wages will be a primary source of weakness for a long time to come. What aggregate income growth we saw – and what also fed into sales growth – was not a rise in wages, but a rise in total incomes driven by rising employment. This is a real trend and will help us throughout 2012, but eventually we will arrive at a point where the absence of wage increases will act as a brake on growth.

So, in my view, we are riding a small wave at the moment, we are not seeing the emergence of anything more than the consequences of having more workers earning wages, coupled with a more general feeling of well-being as the crisis continues to recede. Those two are the factors driving sales. Nothing more.

So looking for the kinds of growth rates Wall Street was forecasting was based on a misunderstanding of what’s going on at ground level.

Having said that, we should not under-estimate growth either.

Sales grew across the board. The big box stores saw growth of around 2.0%; and sales at bars, restaurants, bookstores, and music stores all grew by between 1.0% and 1.5%. Things are generally much better than they were a year ago. The only sales that declined were at online outlets where both internet and mail-order sales dropped by about 1.1%. This may simply be a seasonal oddity, but it is worth watching over the next month or two.

So. What to make of this?

Not a great deal. Ignore the stock market reaction – safe advice under normal times and especially at the moment – and watch wages, employment, confidence, and debt ratios. They are all moving in the right direction, but slowly. Sales won’t move much differently. Nor will GDP. The outlook for modest growth stays in effect. Especially during a year infested with political hyperbole and grandstanding.