Yesterday, we noted that the market "wanted" to rally, courtesy of its oversold condition. Dropping nearly 5% in the previous week does that to traders. However, there is no need to tilt against windmills — be it Buffett’s Muni bond grab or yesterday’s Retail sales data. Smart investors need only look beneath the headlines, and figure out what is really going on.
Let’s use the Retail sales data as an example: Census Bureau reported surprising Retail sales data for January, rising by 0.3% (versus consensus of -0.3%). We stated this reflected energy inflation, not sales growth. Some people disagreed with that assessment, so for them, we will go into the details.
Our first chart, via Mike Panzner, shows year-on-year retail sales (ex-autos). As Mike notes:
"Even that series makes the retail
picture look far better than it actually is. When you subtract out
gasoline station sales, which have been boosted by rising prices for
fuel, the year-on-year change is 2.6%, the lowest pace since April 2003
(see attached). Indeed, gasoline station sales as a percentage of
retail sales (ex-auto) recently hit a record high of 13.1% versus a
median rate of 9.8% since January 1992."
The chart shows the divergment:
Chart courtesy of Mike Panzner
Why ex-autos? Commerce reports a 0.6% rise in car sales January, while the vehicle
manufacturers themselves reported a 6.3% drop in unit sales. The FT noted this differential, quoting Rob Carnell, economist at ING Financial Markets: “There are too
many other indicators pointing in the opposite direction for the rise
in retail sales in January to be accepted at face value, and we would
expect some of this month’s discrepancy to be unwound in the February
But even that is still a nominal data series. If we want to see Real Retail Sales, we need to fully adjust for the pernicious effects of inflation. Haver Analytics has done the heavy lifting for us, and as the chart below shows, Real Retail Sales fell to levels not seen in 5 years:
Chart courtesy of Haver Analytics
This is the first negative Real number this cycle. This, strongly suggests a US recession is either underway or due any month now. And that’s using CPI as the inflation adjustment factor. Its well understood amongst The Big Picture readers that CPI understates inflation.
Consumers are paying more for Food and Energy, to the point that Real Retail sales are negative. What does this say about future discretionary retail spending?
Overview: Failed muni bond auctions deepen crises
Dave Shellock in London and Michael Mackenzie in New York
FT, February 13 2008 18:20