Wednesday, October 16, 2019

Real retail sales decline slightly in September, but the consumer is still alright

 - by New Deal democrat

Retail sales are one of my favorite indicators, because in real terms they can tell us so much about the present, near term forecast, and longer term forecast for the economy.

This morning retail sales for September were reported down -0.3%, while August, which was initially reported at +0.4%,  was revised upward by another +0.2%, so the net decline was -0.1%. Since consumer inflation increased by only +0.1% over that two month period, real retail sales have risen +0.2% in the past two months. As a result, YoY real retail sales, which had been faltering earlier this year, are  still up +2.3%.

Here is what the absolute trend looks like. Notice that this month’s decline barely registers and is well within the range of noise:

Others may use other deflators. I use overall CPI because:
1. I’ve been doing it this way for over 10 years. 
2. This is the deflator used by FRED.
3. It has a 70+ year history.
4. Over that 70+ year history, it has an excellent record as a short leading indicator for employment and recessions. That’s the kind of track record I like.

In terms of the short term forecast, although the relationship is noisy, real retail sales measured YoY tend to lead employment (red in the graphs below) by about 4 to 8 months. Here is that relationship, measured quarterly to cut down on noise, over the past 25 years:

Now here is the monthly close-up of the last five years. You can see that it is much noisier, but helps us pick out the turning points:

The recent peak in YoY employment gains followed the recent peak in real retail sales by roughly 6 months, and the downturn in real retail sales at the end of last year has already shown up in weakness in the employment numbers this year. Similarly I expect the improvement in retail sales to show up in an improvement in the employment numbers by about next spring. 

Finally, real retail sales per capita is a long leading indicator. In particular it has turned down a full year before either of the past two recessions:
In the last 70 years, this measure has always turned negative YoY at least shortly before a recession has begun. That time lag increased to a full year as the US economy has become less centered on manufacturing. Although there have been some false positives, there are no false negatives. In other words, this is a very reliable positive indicator. 

In short, it will take several more months of negative numbers for me to become concerned. As I wrote yesterday, the US consumer is still alright.