Retail Sales were better than expected in August. Total retail sales rose 0.4%, a tick better than the 0.3% consensus expectation, and are up 3.6% from a year ago. However, July was revised down from 0.4% growth to 0.3% growth, which makes the overall level of retail sales about where the consensus was expecting.
However, if one looks deeper into the numbers, it does look like a pretty solid report. The Retail Sales report covers far more than just the shopping malls and is a very broad-based measure of consumer spending. Since consumer spending makes up 71% of the economy, it is a very important number. That overstates things a bit, since retail sales are mostly about the sale of goods, not services, and services make up two thirds of what consumers spend. Still, it is a pretty important thing to watch.
Auto sales were a major drag on overall retail sales in August, falling 0.7% after rising 1.0% in July. On a year-over-year basis they were down 1.5%. Considering that a year ago was the heart of the Cash for Clunkers program, the year-over-year decline in sales of autos and parts is surprisingly small.
Excluding autos, retail sales jumped 0.6%, double the 0.3% rise that was expected, however July was revised down to 0.1% growth from 0.2%. Year-over-year sales are up 4.8%. Still, you have to count this one as a big victory for the bulls. This report significantly undercuts the “economy is falling into a double-dip recession” theme.
That does not mean that consumers are getting reckless with their credit cards again. Most of the strength was in the least discretionary types of stores, and one has to remember that while the numbers are adjusted for things like the number of selling days in the month, they are not adjusted for prices, and thus give more of a picture of what is happening with nominal GDP than real GDP.
Strongest Sales by Category
The strongest category of stores were gas stations, where sales rose by 1.9%, on top of a 2.2% rise in July. Clearly that is mostly a function of higher gasoline prices than it is a sudden surge in the consumption 44 oz fountain soft drinks and hot dogs off the rollers. Year over year, gas station sales are up 9.6%.
Grocery store sales were also strong, rising 1.3%, but that reversed a 0.5% decline in sales in July, and relative to last year sales are up just 2.2%. In other words, Kroger's (KR) might have had a nice month, but it is not a relentless surge of people turning in to gluttons, nor is food price inflation a big long-term problem, at least looking back over the last year. The recent surge in the price of wheat due to the drought in Russia and the floods in Pakistan may have played a role in the big August rise in sales.
Drug stores like Walgreen's (WAG) also had a pretty solid month, with sales up 0.6% after a 0.2% rise in July and are up 4.6% year over year.
The more discretionary types of stores did not fare as well. Sales at furniture stores fell by 0.5%, reversion a 0.6% rise in July and are up 2.4% year over year. Sales at electronics and appliance stores such as Best Buy (BBY) fell 1.1% on top of a 0.3% decline in July, but are up 4.3% year over year. That does not sound like a very good back-to-school season for electronics.
The collapse in home sales, both new and used, also probably depressed sales on the appliance side. On the other hand, sporting goods and Hobby stores had a solid month with sales up 0.9% after falling 0.1% in July and are up 4.0% from a year ago.
Sales in the Building Materials and Garden Center stores like Home Depot (HD) were unchanged on the month after falling 0.4% in July but are up 4.9% from a year ago. Given how weak the construction industry has been, up 4.9% from a year ago is a fairly solid showing, but then again, a year ago things were pretty depressed.
The one discretionary area that did show some strength was in clothing stores like The Gap (GPS), where sales were up 1.2% after falling 0.3% in July, and are up 3.9% from a year ago. Then again, a new pair of jeans is a bit less discretionary than a new kitchen table, but less discretionary than going to the grocery store.
Going out to eat and drink is also a very discretionary item, and sales at bars and restaurants were up jut 0.1%, reversing a 0.1% decline last month and are up 2.9% year over year.
The Take-Away
The overall picture that emerges is that people are willing to spend, but are not doing so frivolously. The more non-discretionary sales did much better than the sales of items that can more easily be deferred for a few more months, or even for another year of so. That is not a picture of the economy going off a cliff again, but it is not a picture of robust health either.
Part of the pickup in the sales of more staple areas could be due to the resumption of extended unemployment benefits for the people who have been out of work for more than 26 weeks. When they were cut off by the GOP filibuster, they were left with no income at all, and since their savings were probably already depleted they could not buy anything -- not even food or prescription medicines they need (unless they went of food stamps or on Medicaid).
It is highly unlikely that now that their $400 per week maximum benefit was restored that they were going to run out and buy a new sofa or a new TV set. They might, however, restock the pantry. The immediate spending they do is one of the reasons that extended unemployment benefits is one of the most effective stimulus measures there is on a dollar spent per job created basis.
If we want to get the economy going again, we need to get money into the hands of those who are hurting, and will spend on the basics, not continue to throw money in the form of massive tax breaks to those who earn in the seven figures per year.
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Auto sales were a major drag on overall retail sales in August, falling 0.7% after rising 1.0% in July. On a year-over-year basis they were down 1.5%. Considering that a year ago was the heart of the Cash for Clunkers program, the year-over-year decline in sales of autos and parts is surprisingly small.
Excluding autos, retail sales jumped 0.6%, double the 0.3% rise that was expected, however July was revised down to 0.1% growth from 0.2%. Year-over-year sales are up 4.8%. Still, you have to count this one as a big victory for the bulls. This report significantly undercuts the “economy is falling into a double-dip recession” theme.
That does not mean that consumers are getting reckless with their credit cards again. Most of the strength was in the least discretionary types of stores, and one has to remember that while the numbers are adjusted for things like the number of selling days in the month, they are not adjusted for prices, and thus give more of a picture of what is happening with nominal GDP than real GDP.
Strongest Sales by Category
The strongest category of stores were gas stations, where sales rose by 1.9%, on top of a 2.2% rise in July. Clearly that is mostly a function of higher gasoline prices than it is a sudden surge in the consumption 44 oz fountain soft drinks and hot dogs off the rollers. Year over year, gas station sales are up 9.6%.
Grocery store sales were also strong, rising 1.3%, but that reversed a 0.5% decline in sales in July, and relative to last year sales are up just 2.2%. In other words, Kroger's (KR) might have had a nice month, but it is not a relentless surge of people turning in to gluttons, nor is food price inflation a big long-term problem, at least looking back over the last year. The recent surge in the price of wheat due to the drought in Russia and the floods in Pakistan may have played a role in the big August rise in sales.
Drug stores like Walgreen's (WAG) also had a pretty solid month, with sales up 0.6% after a 0.2% rise in July and are up 4.6% year over year.
The more discretionary types of stores did not fare as well. Sales at furniture stores fell by 0.5%, reversion a 0.6% rise in July and are up 2.4% year over year. Sales at electronics and appliance stores such as Best Buy (BBY) fell 1.1% on top of a 0.3% decline in July, but are up 4.3% year over year. That does not sound like a very good back-to-school season for electronics.
The collapse in home sales, both new and used, also probably depressed sales on the appliance side. On the other hand, sporting goods and Hobby stores had a solid month with sales up 0.9% after falling 0.1% in July and are up 4.0% from a year ago.
Sales in the Building Materials and Garden Center stores like Home Depot (HD) were unchanged on the month after falling 0.4% in July but are up 4.9% from a year ago. Given how weak the construction industry has been, up 4.9% from a year ago is a fairly solid showing, but then again, a year ago things were pretty depressed.
The one discretionary area that did show some strength was in clothing stores like The Gap (GPS), where sales were up 1.2% after falling 0.3% in July, and are up 3.9% from a year ago. Then again, a new pair of jeans is a bit less discretionary than a new kitchen table, but less discretionary than going to the grocery store.
Going out to eat and drink is also a very discretionary item, and sales at bars and restaurants were up jut 0.1%, reversing a 0.1% decline last month and are up 2.9% year over year.
The Take-Away
The overall picture that emerges is that people are willing to spend, but are not doing so frivolously. The more non-discretionary sales did much better than the sales of items that can more easily be deferred for a few more months, or even for another year of so. That is not a picture of the economy going off a cliff again, but it is not a picture of robust health either.
Part of the pickup in the sales of more staple areas could be due to the resumption of extended unemployment benefits for the people who have been out of work for more than 26 weeks. When they were cut off by the GOP filibuster, they were left with no income at all, and since their savings were probably already depleted they could not buy anything -- not even food or prescription medicines they need (unless they went of food stamps or on Medicaid).
It is highly unlikely that now that their $400 per week maximum benefit was restored that they were going to run out and buy a new sofa or a new TV set. They might, however, restock the pantry. The immediate spending they do is one of the reasons that extended unemployment benefits is one of the most effective stimulus measures there is on a dollar spent per job created basis.
If we want to get the economy going again, we need to get money into the hands of those who are hurting, and will spend on the basics, not continue to throw money in the form of massive tax breaks to those who earn in the seven figures per year.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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