Friday, June 11, 2010

Breaking Down the Retail Sales Number

A lot of nonsense is spewing today because of the negative May retail sales number.

Retail sales fell in May by 1.6%, but this was lead by retail gas prices which fell in May by 7%. The decline in gas prices resulted in a 3.3% decline in consumer spending at gasoline stations in May.

On an annual basis, consumer spending was up by 6.9% in May, marking the seventh straight month of positive annual increases starting in November of last year.

The overall problem I have with the retail sales number is that it aggregates what I consider to be capital good product purchases with consumption good product purchases--and then you have gasoline which can be used as either a consumption good or a capital good ( can be used in, say, manufacturing to produce other goods).

In this period of the business cycle, there should be strength (and some price inflation) in non-durable retail sales. Indeed, if you exclude autos, building materials, and gas sales, the May retail sales number was UP 0.1%. This signals that the Fed tight money policy is continuing to result in a re-adjustment of the economy away from the capital goods sector to the consumption goods sector. Also indicative of this trend was the fact that  non-store retail sales (Mail-order and internet) were up 2.0% versus April and up 15.6% versus May 2009.

This continues to thus be a negative for the stock market, but not because "consumers are spending less", but because it is indicating the Fed tight money policy is having its impact and capital good type retails sales (durable goods) are down and  real-consumer goods (non-durable) continue to climb. That is, the Fed distortions which favor the capital goods sector when the Fed prints money continues to unwind.


  1. The Fed money policy is tight, but interest rates are still very low, aren't they? Artificially low interest rates are what drive people to borrow money for capital goods and cause the unsustainable boom. Right? How can the distortions unwind before interest rates go higher?

  2. It is my contention that the "real rate", the rate that would exist without Fed interest rate manipulation is very low right now. Below where the Fed is keeping the effective Fed Funds rate (at around 0.20%), as evidenced by the fact that T-bills are trading under 0.10%.

    "Low rates" is relative concept and it is fooling most people right now. At current rates the Fed is not printing any money. It is a tight money supply period.