Picerno On Troubling Retail Sales

Friday's retail sales report for March looks pretty bad. It may turn out to be a temporary setback due to the cold weather or an early Easter. That's the optimistic outlook.

The Bleak View
The alternative view is that the weak update on consumption is a sign of deeper trouble for the business cycle in the months ahead. Only time will tell, of course, but for now it's hard to ignore the number du jour. It's still premature to assume the worst, but the latest data point hasn't done us any favors for thinking positively.

Retail sales dropped 0.4% in March, the deepest monthly slide in nine months. Stripping out gasoline sales eases the pain a bit, but there's no getting around the fact that consumption's retreat was broad based, including a 0.4% decline for retail sales ex-autos.

Troubling Trend
More troubling is the sight of deterioration in the year-over-year trend for retail spending. The annual comparison is still positive, but the 2.8% gain for the year through last month is the lowest since August 2010.

The margin for error, in short, has dwindled considerably in terms of the annual trend. A few more rounds of disappointing monthly updates, if it comes to that, and it'll be all but impossible to explain away the numbers as anything other than a sign of contraction for the economy overall.

Some may be tempted to jump on this bandwagon, but it's still premature to argue that that jig is up for the expansion. Yes, the March payrolls report was weak too, and so Friday's retail sales update only adds to the evidence for arguing that deceleration has taken root. But yesterday's initial jobless claims release was quite good and it suggests that it's still too early to label March as the point of no return.

Hard To Tell
Nonetheless, the warning shots can't be ignored, although it may all turn out to be noise. How will we know? More data, of course, beginning with next week's updates on housing starts and industrial production for March. I'll also be paying close attention to how the incoming data influences the Economic Trend and Economic Momentum indexes, which will be revised next week for a fresh read on the business cycle.

For now, it's safe to say that the data looks wobbly by the relatively robust standards of January and February for most indicators. Keep in mind that we've seen this movie before: a spring slowdown that frightens the crowd, but proves to be a false alarm. Is it different this time? No one really knows, but we'll have an answer quite soon.