Have you heard? The punditry think that the US economy is slowing and showing signs of frailty. Wednesday, the fretting focused on September US retail sales, which grew a sluggish 0.1% m/m. In addition, August’s sales were downwardly revised, leading many to again fret that Americans aren’t spending—despite those low gas prices! But before you jump on board with this theme, consider: Retail sales aren’t a complete view of US consumption—they omit most services spending—and, more importantly, those low gas prices are a primary reason retail sales growth looks low. Strip them out, and you see a very different picture indeed.
Advance retail and food services sales are one of the earlier monthly economic data releases, coming only two weeks into the new month. This is why they are called “advance” in this early release. They are later revised in the (non-advance) Monthly Retail and Food Services Sales report, and then revised again, like August’s data. Possibly due to their speed, these data are often treated as though they are the benchmark gauge of US consumer behavior.
Except they aren’t…not even close. The Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE) gauge is far more inclusive. In 2014, for example, inflation-adjusted PCE totaled $10.88 trillion. Inflation-adjusted retail and food services sales for the same period? $5.04 trillion, or a little less than half the size of PCE.
The difference is PCE includes a much broader set of data encompassing consumer spending on services. Retail sales’ report includes only food services’ sales, treating the US services industry as though it were only restaurants, bars and the like. This, of course, isn’t the case. Consumers spend a great deal on health care, housing, utilities, transportation, financial services (and more)—all of which are omitted in the retail sales report, but included in PCE.
So maybe wait for the later report, PCE, which comes out at the end of the month before sizing up consumer behavior. But even then, it’s a mistake to take headline data at face value. One of the dominant financial/economic news stories of the past year or so is falling energy prices. Yet, too often, we find folks don’t account for reduced commodity prices in their assessment of economic data. Chinese imports, US trade, Industrial production reports – they all show skew from commodities. Consumption is no exception.
Retail sales, for example, include sales at gasoline stations, which are down over -17% in the last year. Strip out gasoline station sales, and retail sales rose 0.4% m/m in September, not 0.1%. In Q3, sales excluding gas stations rose 0.9% m/m (July), 0.2% (August) and 0.4% (September). Exhibit 1 pretty clearly shows gasoline station sales have consistently weighed on the overall retail sales measure.
Exhibit 1: Retail and Food Services Sales Skewed Downward by Gas Station Sales
Source: US Census Bureau, Federal Reserve Bank of St. Louis, as of 10/14/2015.
A look back at PCE’s recent trend shows energy prices skew it, too. Exhibit 2 shows year-over-year growth in PCE and PCE excluding energy goods.
Exhibit 2: Personal Consumption Expenditures Also Downwardly Skewed by Energy
Source: US Bureau of Economic Analysis, as of 10/14/2015.
Now, maybe some will argue the aggregate is what counts, as energy sales do contribute to GDP. A valid point, to an extent. But weakness in commodity prices can easily result in strength in other parts of the economy. It is arguably one major reason why profit margins are wide at American businesses! There is little reason to think isolated, sector-specific weakness will infect the broader economy. So the next time you see a report claiming this headline stat shows this-or-that, make sure you ask yourself if this is actually the full picture. Otherwise, you might just find the gauge you are referencing isn’t up to the job, leading you to draw inaccurate conclusions.
By Todd Bliman, Fisher Investments
This constitutes the views, opinions and commentary of the author as of October 2015 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.
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