Weak Retail Sales - Blame It On The Weather Or The Fed?

By: Paul Kasriel | Wed, Jun 15, 2005
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Total retail sales fell 0.5% in May with widespread declines among the major categories. May was cooler-than-normal, which, probably according to the economic bulls, held down convertible sales. And without a sporty new convertible to take you there, folks did not dine out as much either. But if they were cooped up in their McMansions, I wonder why they did not buy more big screen TVs? Or maybe they are just tapped out now that it cost more to extract equity from their homes (aka, personal ATM machines) what with short-term interest rates having moved up and debt-service burdens already high. Whatever the case, the chart below shows that retail sales on a year-over-year basis are losing momentum.

Has All-Items Inflation Peaked?

Kind of looks that way from May PPI data. The PPI for all finished goods dropped 0.6% in May, with the core edging up only 0.1%. As the first chart below shows, on a year-over-year basis, both the all-items finished goods PPI and the core finished goods PPI look as though they might be past their peak. And the second chart below clearly shows that pipeline wholesale price pressures are past their peak.

The headline CPI for May also will likely post a decline. In the event, it would mean that the year-over-year change in the CPI would drop below 3% vs. April's 3.5% increase. Perhaps the Fed should actually listen to its rhetoric. Inflation does appear to be contained. Long-run inflation expectations are coming down based on market-based indicators. Retail sales are moderating. Leading indicators in May are likely to post their fifth consecutive monthly decline and their tenth decline in the past twelve months. Yet Fed policy remains accommodative?

Fed Says There Is No Housing Bubble, But ...

Fed Governor Bies reassured everyone that there is no national bubble in housing, but lenders might be enabling some elements of speculation through easier underwriting standards and offering a full menu of exotic mortgage products to make monthly payments low enough so that almost anyone could initially handle the monthly nut on a McMansion. Governor Bies said that the Fed was considering issuing some supervisory guidelines on commercial property lending, too, after having issued some on home equity lending on May 16 (see http://www.northerntrust.com/library/econ_research/weekly/us/pc052605.pdf). So, it appears as though, despite the "Orwellian fact" that there is no national housing bubble, the bank regulators are going to be asking some tough questions about real estate lending the next time they pay a visit to their constituents.

By the way, I have been fond of saying that although there might not be a housing bubble in Manhattan, Kansas, there is one in Manhattan, New York. I guess I can't use that line anymore inasmuch as a resident of Manhattan, Kansas informed me that residential real estate prices had skyrocketed there, too. Maybe someone out in cyberspace could fill me in on house prices in Manhattan, Montana.


Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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