David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff,where he focused on providing a top-down perspective to the Firm’s investment process. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York. Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.





U.S. retail sales came in weaker for December, at -0.3% MoM versus the +0.5% consensus estimate; excluding autos and gas, retail sales came in at -0.2% instead of +0.3%, as was widely expected; so across the board, a very soft print. Cushioning the blow was the upward revision to November, to +1.8% MoM on the headline from +1.3%; and +1.0% on the ex-autos/gas segment from +0.6% initially.

The problem with having a weak December retail sales figure is that the consumer spending momentum heading into the current quarter is nearly zero

The timing this year of American Thanksgiving and the difference in the number of holiday shopping days may have skewed the seasonal adjustment figures, so it’s probably best to take an average of the two months. Doing that shows average gains of 0.7% on the headline and an uninspiring +0.3% in the ex-auto/gas, though certainly better than a year ago and above expectations heading into the holiday season.

Even so, the problem with having a weaker December number is that the consumer spending momentum heading into the first quarter is pretty well non-existent (a zero build-in on the parts of the retail sales report that feeds into the consumer spending segment of GDP). Businesses will see what is happening to final demand and likely keep the “inventory build” story as a 2009 Q4 adjustment as opposed to a new cycle. Real GDP growth is likely to come in between 4.0-5.0% for Q4 and almost collapse towards 1.0% in Q1 (current quarter) and the surprise would be a Q2 relapse. Tough to handicap, but the expected second half slowdown (in some circles) may be sharper and earlier than many believe.

Taking November and December together, headline sales were up 3.9% YoY but the ex-auto/gas sector was a more tepid +1.6% — this is better than the -2.4% posting at the end of 2008, but outside of that post-Lehman collapse this was still the weakest holiday trend on record (data back to 1972 and that covers six recessions!). What is normal is +6.0% YoY ex-auto/sales growth come November-December; this year it was one-quarter of that and even lower than the 2001 period in the aftermath of 9/11. This is what likely prompted the Beige Book to conclude that “consumer spending in the recent 2009 holiday season was modestly greater than in 2008 for eight Districts, although as retailers in the Philadelphia and San Francisco Districts noted, 2008 sales were so low compared with 2007, that the relatively small 2009 gains did not represent a significant shift in trend” (this information covered the period from December 2 to all the way into January 4, 2010).

Sector trends in the retail sales report:

• In terms of sectors, we have to admit that the electronics store showing of -2.6% sales sequentially was a huge surprise given all the anecdotal evidence to the opposite — and this wiped out almost all of the gain we saw in November too. Since April, there has been nary a penny of sales growth in this space.

• Furniture sales sagged 1.2% MoM in the steepest slide since March, and together with the 0.4% drop in building materials, is a sign that the housing industry is turning down again even with all the tax stimulus.

• Despite all the attention to the up-tick in unit auto sales in December, either there was a shift in the mix towards cheaper vehicles or there was large-scale discounting because dealer receipts actually fell 0.9% on the month.

• There are obviously intense competitive forces under way among the food retailers because sales sagged 0.8% in the worst showing for the year.

• Apparel stores have been suffering as sales posted a 0.6% decline and have fallen now for three months in a row, so this seems to be a downtrend in the making.

• General merchandise stores also recorded a disturbing 0.8% slide in sales in the poorest result since March (this includes department stores). Ditto for restaurants, a sector highlighted as one with eroding performance in the Beige Book, where sales fell 0.6% in December and have declined now in six of the past seven months.

Where were the bright spots?

• E-tailing rose 1.4% and managed to rise 10% on a YoY basis.

• Pharmacies posted impressive 0.8% growth in December, the fourth increase in as many months and the YoY trend has accelerated back above 5% for the first time since September 2007.

• Sporting goods/hobbies/book stores rang up an impressive 1.7% advance and this was the second up-month in a row — we have been hearing that books were a big seller during the holiday shopping season.

• Toys are also in this category and contrary to some of the anecdotal reports.

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