Not So Bad Retail Sales Reveal A Deeper Rot

At first glance, the January retail sales numbers weren’t bad.

But even the mainstream media couldn’t help but find a dark cloud.

The more you dig into the numbers, the unhappier the story becomes.

The headline retail sales number for January rebounded a bit from December’s dismal reading.

The media reported that the 0.2% gain beat economists’ expectations, but wasn’t that great.

In fact, Justin Lahart, writing in the Wall Street Journal’s widely read Heard on the Street column was downright gloomy.

“Scratch its surface and it is quickly apparent that the January retail sales report wasn’t as good as it appeared at first glance. Dig a little deeper and it actually looks awful.”

Making matters worse, the Census Bureau revised December’s number, which was already horrible, sharply lower.

The stock market rallied sharply on the heels of the news, because of course, everybody knows that the weaker the economy, the more likely it is that the Fed will ease monetary policy.

And easy money is bullish. Until it isn’t.

But are investors and traders betting on a false narrative? I suspect that the answer is yes.

The first thing that we know is that retail sales, like most economic indicators, follow the stock market.

Weak December sales came on the heels of 3 terrible months in the stock market.

The economic data tends to lag stock prices by a few months, so even though January was incredibly strong in the market, the retail sales rebound was tepid.

Since stocks did well again in February, I’d look for a big gain in the next retail sales report.

But those are the headline numbers, which are seasonally manipulated to represent an idealized view of the trend.

The Census Bureau has two subsequent monthly revisions and 5 subsequent annual revisions to the seasonal adjustment factors to fit the plot to actual future data as it becomes available.

We like to look at the raw not-seasonally-adjusted (NSA) data so that we can get a clear view of the trend in real time.

By comparing the current month to the same month in years past we can get a clue as to how good, bad, or indifferent the current month was.

We can also look at the annual growth rate to see if it is stable, accelerating, or decelerating.

The retail sales reports are on a nominal basis.

We can apply an adjustment for retail price inflation to get a picture of how the unit volume of sales is going.

We can also normalize for population growth to get an idea of how the trend is progressing over the long term for the population as a whole.

First, on an NSA basis we would expect a big drop between December and January retail sales.

The issue is whether it’s a smaller or bigger drop than recent past years.

This year, the December-January drop was 19.2%.

For everyone complaining how awful the headline number was, the raw data tells a different story.

This was the best January since 2013, which was down 18.7%.

This January was also the second best January since the recovery got under way.

In the short term view, it was a good month.

The annual growth rate has been slowing since the September high in the stock market as retail sales move with stock prices.

But the annual growth rate rebounded in January and probably continued to rise in February along with stock prices.

We should see a good number next month, one that could surprise the market the other way, challenging the current narrative.

While the nominal data looks pretty decent, when we dig a little deeper into the data we start to see the evidence of the long term hollowing-out of the U.S. economy.

Adjusting for retail price inflation leaves us with a flat year-to-year performance.

On a month-to-month basis, however, the December-January drop of -19.8% was, again, the second-best January since the recovery began. It was bested only by the 19% decline in 2013.

February should be even stronger because again we know that retail sales follow the stock market.

When we adjust for retail price inflation and population we get a sobering picture of the overall health of the bulk of U.S. consumers.

While the stock market was soaring to new all time highs, more and more consumers were being left behind.

On a per capita basis, real retail sales per capita were slightly negative year to year.

The benefits of the Trump tax cuts, just like the benefits of the Fed’s QE from 2009 to 2017, pooled at the top.

There has been no trickle down.

The long term trend on this chart speaks for itself.

On average, U.S. consumers are buying less today than they did not only last year at this time, but also less than 11, 12, and 13 years ago.

We have had quantitative easing, massive deficit spending, massive increases in public and corporate debt fed by zero interest rates, and a massive tax cut for the rich and for corporations.

They have all failed to stimulate meaningful, broad-based growth in the U.S. economy.

Only those at the top of the economic pyramid have benefited.

We must ask ourselves how long this hollowing out of the U.S. economy can support a stock market that is rising on the basis of either central bank stimulus, or in the absence of that, of increasing debt.

How long can a stock market bubble continue to outpace the real growth of the economy that supposedly is the basis for the stock market’s rise?

In today’s world, the idea of investing for the long run is fraught with ambiguity and risk.

Harkening back in our history to a time when hard work and thrift were rewarded by fair and reasonable risk free returns, the past is no longer prologue.

Hard work, thrift, and savings are no longer rewarded. They are punished.

Savers are now suckers.

Central banks force interest rates on savings not only below the inflation rate, but to zero and below, robbing risk averse savers of the right to earn income.

They are often forced to consume their principal, often until there’s none left.

This is the dark side of modern central bank policy that no one talks about.

All of the supposed stimulus supplied by money printing and zero interest rates have an equal but opposite economic cost in terms of lost income to savers and conservative investors.

That’s money that can never be invested in the real economy, that can never be spent to help grow that economy.

Instead, it is transferred into the hands of the few for mindless speculation.

Today, we live in a world where speculation and financial finagling are rewarded.

These policies are not only ineffective at stimulating growth.

They are immoral.

They are a cancer destroying the very foundations of civil society.

Regardless of the moral undertone these policies create, if we are to survive and prosper, we must play the game according to the rules the policymakers set.

My goal as an observer of this game is to help give you the information and tools to be able to do that.

Until we meet again,

Lee

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