Real Retail Sales Off To Slow Start in Q2

By: Paul Kasriel | Wed, May 24, 2006
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Nominal retail sales were reported to be up 0.5% in April. If these nominal sales are adjusted by the CPI for commodities (goods as opposed to services), we find that "real" retail sales in April fell 0.6%. You might be able to make out in Chart 1 that price-adjusted retail sales peaked in January. May non-auto nominal retail sales appear to be subdued if there is any merit to the ICSC-UBS Warburg weekly chain store index. The three-week average of this index for May is flat vs. the April monthly average. If CPI-adjusted retail sales remain at the April level in May and June, they will have contracted at an annual rate of 3.2% in the second quarter. If CPI-adjusted retail sales increase by 1.0% in both May and June, they will have grown at an annual rate of just 0.7% in the second quarter. As a point of reference, CPI-adjusted retail sales grew at an annual rate of 13.1% in the first quarter.

Chart 1

The guessing game for the FOMC and for those of guessing what the FOMC will be guessing is whether the weak second-quarter real retail sales is a harbinger of generally weaker economy or an aberration. The Fed "prints" money and prints some of the statistics pertaining to the money it prints, but it pays little attention to either. But I do. Plotted in Chart 2 is the behavior of the CPI-adjusted M2 money supply. On a year-over-year basis, this measure of real M2 was up only 1.3% in April. Although year-over-year growth in real M2 has been lower in this cycle than the April figure, in an historical context, real M2 growth of 1.3% is weak - weaker than what preceded the last recession. In the three months ended April, real M2 contracted at an annual rate of 0.4%. Nominal M2 growth for May is looking anemic. This behavior of real M2 suggests to me that the weakness in real retail sales in the second quarter is more than a one-off fluke, but a warning of continued softness. Another leading indicator that the FOMC seems to ignore but I don't is the yield spread between the 10-year Treasury note and the FOMC's target fed funds rate. As shown in Chart 3, this spread was barely positive at 4 basis points yesterday. Again, in an historical context, a 4 basis point spread represents a restrictive monetary policy. On July 5, 1995, this spread was 19 basis points. On July 6, 1995, the FOMC cut the fed funds rate by 25 basis points because the economy had no lift. I know - it's different this time. But when two leading indicators related to monetary policy line up on the same side and when the sector of the economy that tends to lead the rest - housing - is sucking air, how confident can you be that weak second quarter retail sales are just an aberration? If the FOMC chooses to ignore these leading indicators and tightens on June 29, you also might want to tighten - tighten your seatbelt.

Chart 2

Chart 3



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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