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

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

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

 -Viking will raise
prices 3% – 6% effective Jan 1.  Sub-Zero/Wolf raise prices Dec 15, rumored to
be 4 – 7%

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


-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: (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
? 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.



November 2006
Department of Commerce, WEDNESDAY, DECEMBER 13, 2006

Int. Brand Sales Soar in November
AIADA , Dec 3, 12:19 PM 2006

Beige Book
Federal Reserve Districts Third District–Philadelphia, November 29, 2006

Weekly U.S. Retail Gasoline Prices, Regular Grade
Dollars per gallon, including all taxes

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What's been said:

Discussions found on the web:
  1. ari5000 commented on Dec 14

    consumer spending…

    The dollar is cheap.

    Most people didn’t count on foreigners buying a lot of stuff priced in dollars. That’s the “big picture”.

  2. Barry Ritholtz commented on Dec 14

    Foreign spending on US goods ? Could be!

    But I wonder what the percentage of retail items sold in the US consisted of goods manufactured overseas — Electronics, apparel, furniture, definitely are candidates.

    Also of note: What might the percentage of BMWs, Hondas, and Toyotas manufactured in the US — but bought by overseas consumers — be? Is this a significant factor in the retail data?

  3. Turbo commented on Dec 14

    These monthly series are very noisy. The previous two months were negative, even with the upside surprise the sum of the past three months is about 0 – and that’s in nominal terms, which is very weak.

  4. russell120 commented on Dec 14

    For year-over-year figures, you should have some recovery from Katrina, Rita, Wilma, etc.

    We have had two pretty awful hurricane seasons in a row. Presumably the lack of hurricanes will help some.

    Other then that who knows? Maybe everyone is being generous with the presents this year.

    My understanding is that a lot of the residential rebuilding money in the Gulf has not been distributed. That will also have an impact when it occurs.

  5. Bob Estes commented on Dec 14

    What happened to the comment from BiggerPicture?

  6. Sam Park commented on Dec 14

    Comparing month-to-month is definitely noisy. I’d imagine non-adjusted figures would also show wild swings as well. But if you look at year-over-year adjusted figures, you’d see a downward trend being developed.

  7. Teddy commented on Dec 14

    What’s wrong with the bond market the last couple of days? Indigestion and gas from overeating?

  8. anon commented on Dec 14

    Quote from the SpendingPulse article:

    However, its “core” measure of sales, which excludes gasoline and building materials, recorded its first monthly drop since March, falling 0.2 percent on a seasonally adjusted basis after a 0.1 percent gain in October.

  9. Michael Newton commented on Dec 14

    I believe it was Groucho Marx who said “Who are you going to believe, me or your lying eyes?”

  10. STP commented on Dec 14

    This is from the Census site!

    “How were the restated October 2006 Advance estimates derived? Gawd, this is total flaming number gaming at it’s best. They’ve got Greenspan beat!

    The restated October 2006 advance unadjusted sales estimate for each detailed industry was derived by multiplying the restated preliminary unadjusted sales estimate for September 2006 by the September-to-October change in sales estimated from the new Advance Monthly Retail Trade Survey (MARTS) sample. Using the restated unadjusted estimates, we computed new seasonal, holiday, and trading-day adjustment factors for each detailed industry and used them to produce adjusted advance sales estimates for October 2006 and the revised sales estimates for October 2005. Advance sales estimates at broad industry levels were derived by summing the appropriate detailed industry estimates.

    For more information on the restatement of the preliminary sales estimates for September 2006 and the final sales estimates for August 2006 and September 2005, please see the Monthly Retail Trade Survey (MRTS) website at: ”

  11. Sam Park commented on Dec 14

    Adjusted figures are for statistical purposes. Census uses the ARIMA (autoregressive integrated moving average)to make these adjustments. By applying these statistical techniques, you’re smoothing away noise created by holidays and trading-days (prefered shopping days, days in a month, etc.). You can see these seasonal factors on the Census site. If you graph it out, you’ll see this cyclical weights that rises in summer, then drop, then rise in Nov and Dec. Hmmm… these are prime spending seasons. If you didn’t factor these in, then you’d get this wild seasonal fluctuations in retail spending. I think the point of using adjusted figures is to see the general spending trend without the seasonal swings.

  12. flambeee commented on Dec 15

    special factors? is that what you call it when you simply dont understand?

    seriously though, didnt you say the market would go up h1 ’06 and down, way down, h2 ’06?

    nice call wrong way…

  13. diva commented on Dec 15

    There are a kazillion reasons why the ‘data’ is unreliable:
    1. Take sales taxes (for instance) – www and/or catalogue shopping usually does not engender sales taxes.
    2. Walmart does less well when folks shop UP in better stores.
    3. Govt data collection of anything is a total joke, in my not so humble opinion. (the real world has been changing so much faster than the govt for so many years…. that “garbage in = garbage out” takes on a whole new meaning)

    I am surprised that you (pretend to?) remain surprised.

  14. jagmohan swain commented on Dec 15

    I am flooded with credit card offers everyday.I was thinking that Fed is tightening credit by raising Fed rates!Anyways the enormity of housing crisis would unfold when economy starts tanking and when that happens it won’t be happy time for debt-strapped consumers.When I talk to my colleagues who have owned a house in last 1-2 years I am constantly amazed by the sheer unpreparedness of these people for economic hardtimes.Every one of them spending $2000 or more every month for their mortgage and other maintenance fees.So how prepared they are to keep paying these mortgages ( those are 5 year ARMs by the way ) if they happen to lose their jobs.Not very as per them.Some can stay solvent for 2 months others a little longer.But a protracted slump in economy means definite default on mortgage.By the way all are unanimous in their view that housing market will rebound or at least their house price will recover.So now we know why Fed will do everything within it’s means to keep the economy going as long as it possibly could.Else the vicious cycle of housing market collapse -> economic collapse -> even severe housing collapse will play out in full force.So Fed will risk a falling dollar to save economy by keeping the consumer spending going thru further asset inflation ( in large cap stocks, bonds ).

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