Don’t believe the hand wringing about last week’s retail sales miss. Retail sales are going gangbusters.
But that’s not bullish, and you know why. Strong retail sales will keep the Fed on its tightening track. And even stronger retail sales would encourage the Fed to tighten even more and even faster than currently expected.
And that might just be the path the economy is on.
So beware being so easily convinced by the media playing the game of “Divert the Herd” on the August retail sales release.
Instead, let’s peel back the onion so that we can get a better understanding of why the reports were off, as usual.
Urgent: Time is almost up (and our economy could soon buckle)
The Media Was Worried After the Reports. Here’s How We Can Avoid Being Fooled Too…
The Wall Street Journal was restrained in its reporting:
“American consumers reined in their spending in August, taking a breather after very strong sales growth in July. Sales at retail stores and restaurants rose 0.1% from the prior month to a seasonally adjusted $509 billion in August.”
Bloomberg, which seems to be taking a more sensationalist, click-baiting approach since it went behind a paywall a few months ago, was more hysterical. It played the expectations game:
“U.S. Retail Sales Trail Forecasts as Autos, Apparel Decline.”
Economic forecasters had expected a 0.4% gain on average. Bloomberg expressed consternation. “U.S. retail sales rose by less than forecast in August … as purchases of automobiles and clothing fell, suggesting households took a breather from spending.”
As usual, the media was fooled by the seasonal adjustment hocus pocus that often results in big revisions. For instance, July’s sales gain was revised up from 0.5% to 0.7%, which on the face of it is a patently ridiculous rate of 8.4% annually. That’s just not real. But neither is the reported 0.1% August gain, which annualized is 1.2%.
When we strip out the seasonal fudging, inflation, and the effect of rising gas prices, and normalize for population growth, we see that neither rain, nor sleet, nor snow, nor tax cuts, slows or speeds American consumers from their appointed rounds. The growth trend has been steady and persistent since the recovery began in 2010.
Yes, the headline retail sales numbers do considerably overstate real, inflation adjusted performance. But no, they are not slowing down. We can see that in this chart, breaking down nominal sales, versus inflation adjusted sales (real), and real sales per capita.
Nominal retail sales have been soaring, but adjusted for inflation and population growth, real sales per capita have barely recovered to where they were in 2007, just as the housing bubble was beginning to deflate.
It all comes back to our Tale of Two Economies. Those of us at the top of the economic heap are doing well and are driving the topline numbers to show growth. But the majority are struggling to just make ends meet. They are barely caught up with where they were before the housing bubble collapsed and took the financial market and the economy with it in 2007-09.
In the short run, that doesn’t matter to the stock market. We’ve had this condition of financial benefits flowing to the top while the bottom struggles for the past 8-9 years and the market hasn’t minded one bit. In the long run, it will matter. Today, it doesn’t. For now, the only things that matter are the same things that always matter. Don’t fight the Fed and the trend is your friend.
The problem is that those forces have been at loggerheads for most of the past year and the trend has been winning. The Fed is going all out to rein in the stock market bubble by constantly pulling money out of the banking system. But the trend is up, up, up.
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Despite Media Concerns About Slowing Retail Sales, The Fed Will Keep Tightening
Regardless of the hand wringing about slowing in August, there’s nothing in the retail sales data that would change the outlook for more Fed tightening, perhaps much more. In fact, when we strip out the seasonal adjustment, it’s apparent that sales didn’t even slow.
A simple visual of total retail sales, not seasonally adjusted shows us that. Forget about slowing in August! The trend is actually accelerating.
We can analyze the not seasonally adjusted trend by looking at the annual growth rate (lower graph), and by comparing this August with past ones.
The annual growth rate in August was an astounding 6.9%. That’s just a tenth of a percent off the fastest growth rate of the past 2 years, set in May. It’s among the fastest growth rates of the past 6 years. Remember, that includes inflation. CPI was up 2.7% year over year in August. That still leaves a red hot 4.2% growth rate in real retail sales.
On a month to month basis, sales rose 3.3%. Sales always rise between July and August as parents scurry around for kids back to school stuff. And there’s no sign of slowing in this number either. The 3.3% August jump was a hair better than August 2017’s 3.2%. Except for one August which was rebounding from a negative July, last month was the best August in the past 11 years.
Hardly a slowdown.
Important: This threat is sounding alarms worldwide
Since the Fed is Determined to Deliver Bad News, Here’s What to Do
The bad news is that the Fed will focus on the raging red hot top line numbers, not the fact that millions of our fellow consumers are struggling. The topline numbers will keep the Fed on a tightening course, and may even encourage the Fed to tilt toward additional tightening.
A runaway breakout in stock prices would only encourage the Fed to clamp down even harder. But that won’t matter in the short run.
Looking at the charts, S&P 2930-40 is an important trend resistance area. If the market clears that, I’d buy at the money SPY calls with a month to expiration to take advantage of what should be a final blowoff to 3000. But if the market rolls over below this range, and you are still holding SPY calls from the breakout through 2850, now would be a good time to take profits.