Tuesday, April 17, 2007

Another Look at Retail Sales

The government sharply raised its estimate of February retail sales, saying they rose 0.5%, instead of the previously reported 0.1%.

"It was a decent report, especially when you take into account the revisions," said Haseeb Ahmed an economist with J.P. Morgan Chase & Co. "It basically points to a consumer that is doing OK."

The latest numbers on consumer spending indicate that personal-consumption expenditures are growing at a rate of about 3%, slower than the 4.8% rate recorded in the first quarter of 2006.

Consumer spending, which accounts for about 70% of U.S. economic activity, has taken on greater importance in recent months because it is one of the economy's few remaining areas of strength. The decline in housing construction has taken a huge bite out of the economy over the past year and rising foreclosures are also expected to hurt economic growth.

Here are two charts from the Wall Street Journal. Let's look at them in a bit more detail.

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I have drawn a fairly arbitrary line on this graph of retail sales that separates two growth trends. Section A has a strong upward movement and is a very strong trend. While section B is also moving upwards, notice the slope is less steep, indicating growth is weakening a bit.

Here is a chart from IBD that shows the change in the slope

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This next chart shows the impact of that less steep slope:

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The last few months could be a slight reprieve from the downtrend or the start of a new uptrend. We won't for a few months.

What's keeping consumer spending going is employment and wage growth.

"Consumers may not be happy with high energy prices right now, or weakness in the housing market. But as long as the job situation is still really good they have the income to spend and they're spending it," said Gary Thayer, chief economist at A.G. Edwards.

But when talking about job growth, remember this chart:

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The job market is a lagging indicator. And this chart indicates employers act quickly when trouble emerges.