Thursday, June 16, 2022

Retail sales drop! But I'd wait a bit more before hitting the panic button

You know how I’ve said that inflation has been more an annoyance than a drag on the economy, and that I won’t worry much until I see evidence of a consumer slowdown.

Uh Oh.
Retail sales turned negative in May as consumers pulled back spending while inflation surged, the Commerce Department reported Wednesday.

Advance retail and food service spending fell 0.3% for the month, below the Dow Jones estimate for a 0.1% gain. Excluding autos, sales were up 0.5%, which fell short of expectations for a 0.8% increase….

Sales were well below the pace in April, which posted a downwardly revised 0.7% increase from the initial 0.9% estimate.
That’s a number BEFORE inflation is figured in, and includes a 4% increase in gasoline sales. Take out gas, and retail sales dropped by 0.7% for May, which sounds disastrous, and an indication that those higher gas prices are now leading to cutbacks in other areas.

However, I note that last month's decline came after 4 straight months of solid gains to begin 2022.

And as I dug into the actual report, my initial alarm was calmed a bit. That’s because of our old friend “seasonal adjustment.”

Retail sales, seasonally adjusted vs raw totals May 2022
Total Retail sales
Raw total +2.4%
Seasonally adjust. -0.3%

Retail sales minus gas stations
Raw total +1.5%
Seasonally adjust. -0.7%

Retail sales minus autos, gas stations
Raw total +3.3%
Seasonally adjust. +0.1%

Bars and restaurants
Raw total +3.5%
Seasonally adjust. +0.7%

Building material, garden supply stores
Raw total +9.1%
Seasonally adjust. +0.2%

So we may well be seeing that our “decline” in retail sales is simply lower-than-normal increases in spending that traditionally happen in May. This would explain how we can see many retail sectors with “help wanted” signs despite an alleged “slowdown” in sales.

In a way, this could work out well, as a flatlining of growth allows time for labor shortages to catch up to demand. This would be the “soft landing” scenario that is frequently mentioned, where inflation settles down and there is little/no recessionary results.

But I also can’t blow this off, and it certainly should give us caution about what kind of economic distortions are going to happen this Summer as Americans deal with higher prices at the gas station and in other places. Will the American consumer jump off the merry-go-round that so far has helped us grow through the inflation of the last year?

That possibility illustrates why my hope/fear is for the Fed not to overdo their rate hikes. We don’t need to send the real economy into a nosedive, but I am worried these central bankers might listne too much to the Wall Street doomsayers, and be fine with that. And I'm especially worried that the decline could come right before a midterm election where a blind vote against the party in power (or perceived to be in power) could wreck things in America for a lot longer.

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