Retail Sales In Decline

In March of this year we wrote:

The release of the retail sales data today sure got a lot of people excited about the economy. In reality, this was much more a statement of inflationary pressures and weather related anomalies than economic improvement.

Those inflationary pressures and weather related anomalies have now come to an end and the negative impact to the retail sales data has not been positive.


Retail sales in May were pulled down by a decrease in gasoline prices and declined 0.2 percent. This followed the drop of 0.2 percent dip in April which revised down from a positive 0.1 percent. Weakness was led by gasoline stations (down 2.2 percent) and building materials and garden equipment (down 1.7 percent). Also declining were food and beverages, health and personal care, sporting goods and hobby, general merchandise, miscellaneous store retailers, and food services and drinking places. In other words — sales declined in just about every area where the consumer lives day to day.

Back to our March report:

We have pointed out recently several times, the impact of warmer than normal weather tends to skew data points that seasonally adjusted for the effects of historically colder weather. Since Spring is now upon us those effects will go away which could have a more negative impact on the data going forward. The retail sales data is currently unadjusted for inflation, which we will get at the end of month and real retail sales figures show quite a different story with very little increase at all. Most importantly, the retail sales numbers don't conform to private sector data which is showing a far weaker picture of the consumer.

Those expectations are now coming to fruition as retail sales stumble.

In the chart you will see that the peak of retail sales occurred, on a year-over-year basis, in June of 2011. This has occurred only twice before, historical data only goes back to 1992, and each time it has preceded economic weakness. Furthermore, we are holding our estimate for 1st Quarter GDP at 1.6%, which is lower than the current 1.9%-second estimate, as the April benchmark revisions were more negative than originally anticipated.

The downside revisions to April and March have wiped the earlier retail sales strength as we expected. The 0.17% monthly decline in May would have been a decline of 0.84% before prior-period revisions. After inflation adjustment, revised sales have now been unchanged for the last four months.

The release of CPI tomorrow will allow us to assess retail sales on a "real" or "inflation adjusted" basis. It is likely that the decline in CPI will push today's retail sales number slightly higher to an unchanged basis or even slightly positive. This adjustment won't affect the very negative trend in retail sales. Retail consumption is definitely under pressure as wages remain stagnant and savings decline as credit remains tight. Considering that 71% of the economy is dependent on Personal Consumption Expenditures, and retail sales make up roughly 40% of PCE, economic weakness is likely to persist in the coming months ahead, which will clear the way for further stimulative action from the Federal Reserve.