Orlando's Outlook: Gas-price surge boosts consumer spending
Bottom line Nominal retail sales in August rose at their fastest pace in six months, giving investors some confidence that Back-to-School (BTS) sales were, in fact, following July’s solid gains. But commodity price inflation—particularly the recent spike in energy—is largely responsible for the headline gains, and if we strip out the impact from volatile auto and gasoline results from nominal retail sales, then core retail sales, in our view, actually underperformed. The bar is relatively low, however, as the sequential monthly change in retail sales was actually negative in April, May and June, accounting for the first three-month decline in consumer spending since the financial crisis in 2008. So we’ll be watching trends in commodity-price inflation and store-level sales results closely in September, to gauge the strength or weakness of third-quarter Gross Domestic Product (GDP) and glean some clues about the all-important Christmas retail-sales season, which historically is 80-90% correlated with BTS.
August retail sales looked good on the surface Nominal retail sales for August rose by 0.9% (a tick better than expected), while July was revised down two ticks to a still-solid gain of 0.6%, and June was unrevised at a decline of 0.7%. Core retail sales in August, which strip out volatile auto results, were also a tick better than expected with a gain of 0.8%, which was the same robust pace in July, while June lost 0.8%. But adjusted core retail sales, which strip out the results from both gasoline and auto sales, rose by only 0.1% in August, which was well below the 0.4% consensus increase that had been expected. That compares with a strong 0.8% gain in July and a 0.4% decline in June. However, retail “control” sales—which back out autos, gas and building materials and is a direct input into quarterly GDP— actually declined by 0.1% last month, compared with consensus expectations for a solid 0.4% increase. In contrast, retail “control” rose by a robust 0.8% in July, but fell by 0.3% in June.
Devil is in the details Digging into the detail, service-station gasoline sales leapt by 5.5% in August—the most since November 2009—versus a 0.4% increase in July and a decline of 3.5% in June. Sales at auto dealers rose by 1.3% in August—the most since February—compared with a tepid 0.1% gain in July and a 0.4% decline in June, as total vehicle sales hit a strong 14.46-million annual unit run rate last month. In contrast, clothing and general-merchandise sales in August, which are more reflective of normal BTS shopping trends, actually fell by 0.1% and 0.3%, respectively, compared with increase of 0.7% and 0.1% in July.
Industry comparable-stores sales better in August than July But the Commerce Department’s mixed data is in sharp contrast to much stronger industry retail-sales data. The International Council of Shopping Centers (ICSC) reports that industry comparable chain-store sales rose by 2.6% in August versus a 1.9% gain in July and only a modest 0.2% bump in June. Excluding poor-performing drug stores, industry comps rose by 6.0% in August versus gains of 4.6% in July and 2.6% in June, according to the ICSC’s index of 22 retailers. Luxury was the industry’s strongest category by far with a month-over-month gain of 21.0%. But apparel and department stores—two important BTS categories—rose by 8.1% and 7.1% respectively last month, which confirms that BTS has been solid, to date. Total nominal store sales for August rose by 4.1%, compared with gains of 3.4% in July and 1.9% in June. So perhaps the Commerce Department’s relatively weaker results will be revised higher next month.
It’s all about commodities Since the imposition of the Iranian oil embargo on July 1, crude oil prices (West Texas Intermediate) have soared by 29%, from $78 then to $100 today. Over this time, the national average price for a gallon of unleaded gasoline has risen by 16% from $3.33 to $3.87, which suggests that retail pump prices may continue rising to more than $4 per gallon in coming months, following the larger spike in WTI with a lag. In fact, prices are already well above $4 in California and New York. In our view, higher energy prices serve as a tax hike for businesses and consumers, and this could further impair spending trends, economic growth and job creation going into the presidential election. It’s a similar story with agricultural commodity prices, with their spike a reaction to the worst drought in farm states in half a century. Corn prices rose by 70% over the past three months, with 45% price increases in wheat and soybeans.
Nominal inflation heating up but core is benign This recent spike in food and energy commodity prices has increased nominal inflationary pressures, although core readings remain benign. Month-over-month headline inflation in August for the retail Consumer Price Index (CPI) and the wholesale Producer Price Index (PPI) leapt by 0.6% (versus 0.0% in July) and soared by 1.7% (versus 0.3% in July), respectively, while on a year-over-year basis, nominal CPI rose by 1.7% versus a 1.4% increase in July, and PPI increased by 2.0% versus 0.5% in July. But that hasn’t yet worked its way through the inflation pipeline, as core year-over-year inflation (which excludes volatile food and energy price changes) rose by 1.9% in August for the CPI, compared with 2.1% in July, while the PPI was unchanged at a 2.5% increase for the past two months. The Personal Consumption Expenditure (PCE) index, the Fed’s preferred measure of inflation, declined to a 1.6% year-over-year core gain in July versus a 1.8% increase in June.
Consumer confidence divergence We remain puzzled over a confusing divergence in consumer confidence between the Conference Board and Michigan indices. This morning, the University of Michigan consumer sentiment index rose to a much stronger-than-expected 79.2 in September (74.0 consensus estimate), its strongest reading since 79.3 in May, which was a four-year high. The Conference Board, in contrast, recently plunged to a much weaker-than-expected 60.6 in August (66.0 consensus estimate), which was its largest monthly decline since last October. Participants cited concerns related to the weak labor market and soaring energy prices. Clearly, we need improved consumer confidence and sentiment to generate more robust consumer spending trends. Because consumer spending accounts for 70% of GDP, we’re watching these important variables closely.