- by New Deal democrat
Let me start out this month with a historical review of why I have always paid so much attention to real retail sales.
Going back almost 80 years, real retail sales have always turned down in advance of a recession, and they have almost always turned negative YoY simultaneously or close thereto with the onset of recessions. Here’s their record prior to the Great Recession:
With the exceptions of 1952, 1966, and a couple of months in the 1980s, this was a flawless indicator.
Here is the record of the updated version from the 1990s until the pandemic. For reasons I’ll explore more fully below, I also include real sales using CPI ex-shelter (light blue, narrow) and real personal consumption of goods (red):
Again, a flawless record, with the exception of a few oddball one month outliers. Real sales ex-shelter and real spending on goods have similar records.
There is also a demonstrated 50+ year history that consumption leads jobs. It is the change in demand revealed by sales which leads employers to add or subtract workers. And real retail sales have traditionally been an excellent measure of consumption. Here’s the modern record from the 1990s until the pandemic:
So I have a nearly flawless short leading indicator of the economy, and also a noisy but leading indicator for employment as well.
With that into, this morning’s read for February retail sales was a disappointment. In nominal terms, sales increased 0.2%. But because consumer inflation also increased 0.2% in February, real sales were unchanged. Ordinarily this would not be a particularly negative result, but January’s measure, which already was a negative -0.9% nominally, was revised further downward to -1.2%. That’s a significant downdraft. But it is also at variance with the result using CPI ex-shelter and real spending on goods. In particular, when we exclude shelter prices from CPI, although there has been a genuine downturn in the past two months, real sales remain above all levels except for last autumn:
Note that I have started including ex-shelter real sales in the last few months because house prices have had such an outsized distorting effect on the shelter component of CPI since the pandemic.
Now let’s update the YoY figures since the pandemic.
Following the pandemic stimulus, real retail sales as an indicator completely failed, likely partly because consumers had stuffed themselves on goods purchases with their stimulus funds, and turned to spending on services instead. And partly because house prices as measured by “owners equivalent rent” distorted CPI to the upside, the unit of comparison was unusually unrepresentative.
That being said, we are now three years out from the stimulus, and shelter prices are less distorting now than in the past several years, so I expect the historical relationship to gradually re-assert itself.
And YoY, even with the downdraft of the past two months, YoY real retail sales are higher by 0.3%. Excluding shelter, they are up 1.1%:
Neither measure is recessionary.
Finally, because as I noted above, consumption leads employment, per the above paradigm, let’s plug in the latest real sales and consumption data and compare it with the latest jobs trend:
The two series have been coming much closer to being in sync. Keep in mind that based on the most recent QCEW updates, I anticipate further downward revisions to last year’s jobs data. Still, while the forecast remains for positive employment reports, the suggestion is that there is likely to be continued deceleration.
