How Good Were Retail Sales Really?

I must admit to being baffled by yesterdays’ Retail Sales Data. I am as guilty as anyone else of having selective perception; Like most people, when something doesn’t jibe with my world view, I suffer through a bit of cognitive dissonance.

My saving grace is that I at least recognize these biases, which
gives me a fighting chance to see reality without all these filters.
That’s why I am so keen on looking past the headline data and taking
apart the details beneath.

Even acknowledging these inherent biases won’t prevent me from
scratching my head over the direct conflicts between what we heard from
various participants over the past month, and the Retail Sales Data for
November.

As an exercise, let’s review a half dozen questions that came up
regarding where the recent retail data might be somewhat over-stated.

And to show what good sports we are, let’s make it even more challenging. In our short list, we won’t even mention the
nations largest retailer, who accounts for nearly $1 out of very $10 US retail dollars spent (I beleive ex autos and gas),
and is having an absolute stinker of a quarter.

Here’s a half dozen issues worth pondering:

1)  Why does Commerce Data disagree with what we heard from the Retailers themselves?

-The past 4 weeks, Retail Same Store Sales data was soft;
-Mall traffic was "uninspiring"
-Durable goods numbers were weak, inventory has built;
-Both Lowes and Home Depot warned of disappointments, yet Commerce showed sales in Building Materials increased; (See seasonal adjusted below)

Retail data made me think of Richard Pryor Groucho Marx’s great line: "Who are you going to believe, me or your lying eyes?"

2) Price Increases:  "The
U.S. Census Bureau announced today that advance estimates of U.S.
retail and food services sales for November, adjusted for seasonal
variation and holiday and trading-day differences, but not for price changes." (emphasis added)

We have watched food prices creep up over the past year. A friend steers us to the website ApplianceAdvisor,
which tracks, amongst many other items, price inflation in white goods
sold. Given the increases in steel, aluminum, copper, plastic, etc.,
this should come as no surprise:

Price Increases
-Effective Jan 1, 2007,
Electrolux will raise prices 3%-6% on all top mounts fridges, freezers. 
Electrolux also warned that they would likely jack up prices on laundry
too.
 -Viking will raise
prices 3% – 6% effective Jan 1.  Sub-Zero/Wolf raise prices Dec 15, rumored to
be 4 – 7%
 -Sub-Zero/Wolf
raise prices Dec 15, said to be actually 7 – 10%
 U-Line price increase 4% (depending
upon model, effective Jan 31, 2007.

ApplianceAdvisor’s Price Increase Report
shows significant price increases over the past 3 years, and 2006 is
not expected to be much different.(CPI data is next out Friday 12/15)

3) Tax Receipts: The Liscio report
keeps detailed surveys of estimated State sales-tax receipts. Their
data showed only 27% of the respondents in the Liscio survey had sales
taxes received matching or exceeding expectations; This was down from
55% in October.

"The weakening consumption trend is now established, and the majority of our tax
contacts expressed real concern about a slowing in sales-tax collections. It now
appears clear that consumers are not spending the billions of dollars they have
saved on gas in recent months. . ."
-Liscio Report

For the 3 months ending October, average monthly retail change (ex autos) was
a minus 0.5%, consistent with Liscio’s sales tax survey; During that period, gas prices were declining; They have since begun to creep upwards.

4) (gotta love those) Seasonal Adjustments: What happens when we look at the actual (rather than massaged) data?

As Expected:

-Autos dropped from $64,968M to $63,710M;
-Electronics exploded from $7,972M to $10,387M;
-Building Materials went down $29,961M to $28,814M

Surprisingly:

-Furniture increased nearly 10% from $9,925M to $10,947M;
-Clothing and apparel increased from $17,504M – $19,955M;

Bottom line: Price cutting is what has led to some sectors doing well; Inflation may be present in other sectors.

5) Declining Margins:  There was some genuine strength in the data, with electronics up 4.6%. But as Best Buy showed, heavy holiday discounting was not without a cost, according to the most recent Fed Beige Book:  “Retailers
indicated that they have implemented price reductions for some lines of
merchandise, especially consumer electronics and home appliances, but
that prices for most other types of goods have been kept near plan.” 

6) Commerce Department Sample Alteration:
According to yesterday’s Retail Data release, "a new sample was
introduced effective with the restated October 2006 advance estimates
that were released on November 30, 2006. This release, and all
subsequent retail estimates, will be based on this new sample. For more
information please visit:  http://www.census.gov/retail (emphasis added)

Is it a coincidence that an upside surprise, in contradiction to most of the other data  points, occured when the Commerce Department rejiggered their methodology, starting with October’s revisions and November’s initial
report? If they were to recalculate prior Retail
Sales figures with this new sample, what would that do to the data?

~~~

Conclusion:  Yesterday’s data was inconsistent with prior
retail data, mall traffic, and State tax reciepts. Some sectors
(Durable Goods, Building Materials, Clothing)  have seen price
increases; other sectors — most notably autos and electronics — have
generated sales increases through massive discounting.

Lastly,  an altered retail sales measuring methodology may also have played a part in the surprise +1.0%.

We agree with other economists who have concluded that the November
jump in sales may have been influenced by "special factors."  Rather
than explain the sudden surge in consumer spending despite prior
evidence to the contrary as the resumption of a consumer spending
spree, we see it as increasingly likely that sales will be revised
downwards next month.

>

Sources:

ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES
November 2006
Department of Commerce, WEDNESDAY, DECEMBER 13, 2006
http://www.census.gov/svsd/www/marts_current.pdf
http://www.census.gov/svsd/www/retail.html

Int. Brand Sales Soar in November
AIADA , Dec 3, 12:19 PM 2006
http://www.aiada.org/newsroom/newsDetails.aspx?id=57244

Beige Book
Federal Reserve Districts Third District–Philadelphia, November 29, 2006
http://www.federalreserve.gov/fomc/beigebook/2006/20061129/3.htm

Weekly U.S. Retail Gasoline Prices, Regular Grade
Dollars per gallon, including all taxes
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html