Retail Sales Beginning To Feel Effects of Housing Slowdown

By: Paul Kasriel | Wed, Jun 14, 2006
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Today's May retail sales data provided more confirmation of a significant deceleration in economic growth. Total nominal retail sales were up a scant 0.1%. And without the boost from gasoline sales, which, themselves were probably boosted by gasoline price increases, retail sales were down 0.1%. The April-May average of nominal retail sales ex gasoline is up an annualized 1.7% vs. the first-quarter average. This retail sales aggregate grew at an annual rate of 14.2% in Q1. This is why we are forecasting second quarter real PCE growth of only 1.8% annualized vs. 5.2% in the first quarter.

It appears as though the slowdown in the housing market is starting to have negative multiplier effects on retail sales. For example, the April-May average of furniture and appliance sales is contracting at an annual rate of 2.7% vs. the Q1 average. These sales grew at an annual rate of almost 20% in Q1. Similarly, the April-May average of sales of building materials and garden equipment/supplies is contracting at an annual rate of 5.3% vs. its Q1 average. These sales grew at an annual rate of 33.6% in Q1. (Yes, I know that building materials are not part of PCE. But they do count n the GDP box score - under residential investment.) We've been told not too worry much about the effect on consumer spending from housing's slowdown because employment growth will pick up the slack. Well, employment growth is slowing, in part because of a slowdown in construction hiring. Is the slowdown in consumer spending that is upon us going to generate increased employment? You need to think in general equilibrium terms, folks - not partial equilibrium terms.

Wholesale Consumer Goods Inflation Moderating

Despite rising commodity prices - rising, that is until the past few weeks - wholesale price increases for consumer goods appear to be moderating. As shown in the chart below, the 6-month annualized rate of growth in the PPI for finished consumer goods ran at 2.4% in May. Its recent peak rate of growth was 9.8% back in December. When energy is stripped out, the 6-month annualized rate of growth in the PPI for finished consumer goods was only 0.5%. The recent peak rate of growth of this measure was 4.4%, hit way back in February 2005. It's that rascally "Owner's Equivalent Rent" that we have to watch out for in the May CPI, which will be released on Wednesday. Ironically, falling natural gas prices, which will hold down the all-items CPI measure, could boost OER. The core giveth and the core taketh away.



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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