Last week, investors opened up newspapers (or iPad and iPhone apps or news aggregators) and learned that US retail sales were weaker than consensus, which was true. News outlets, however, made it sound like the retail economy had really ground to a halt relative to recent experience. They especially focused on retail sales ex auto and gas, which declined 0.06% on a month over month basis. Take this reporting from The Wall Street Journal after the numbers were reported. The headline blared, “Consumers Dial Back on Their Spending.”
Consumers moderated their spending in June…the latest sign the economy is trudging through a weak patch in the middle of the year…The June report suggests consumers remain cautious about buying anything other than basics
Yes, well consumers did pull back on a month over month basis, but it’s not like spending cratered. The month over month decline was barely a statistical blip in the grand scheme, about half a standard deviation below the historical mean for month over month ex auto and gas figures. In any case, there’s a lot of noise around monthly figures.
Let’s take a step back and look at the year over year gains for retail sales ex auto and gas, a figure very few news outlets reported or discussed. YoY, retail sales ex auto and gas were up 4.51%, slightly higher than the historical mean of 4.49%. Retail sales overall were up 5.72% YoY, higher than the long-term average of 4.61%. From that perspective, retail sales don’t look too bad. Plus, that was the highest year over year figure for monthly retail sales ex auto and gas since December.
Taking a broader perspective, we also know that GDP growth has remained sluggish the past several quarters. Since Q1:2010, year over year real GDP growth has averaged 2.1%, below the long-term historical average of 3.1%. Articles such as the one cited above commonly mention the fact that slow consumer spending and declining retail sales and hidden wallets are to blame. Are they really? The average monthly year over year gain for retail sales from January 2010 through the most recently reported month is 4.4%, pretty much exactly in line with the historical average. Over the past 18 months, the average is 4.6%, above the historical average, and the over the past 12 months, the average is 4.2%, just slightly below the historical average and basically in line statistically.
A similar situation developed in the wake of the durable goods number yesterday. While the headline number was strong, some pointed out that the month over month non-defense capital goods, ex-air, number was sluggish. It came in at 0.7% month over month, roughly in line with consensus while the headline number came in at 4.2% month over month. Again, we’ve been told time and again that slack in this area of the economy is to blame for sluggish economic growth. Again, the numbers don’t necessarily add up. Year over year, Capital Goods Orders, ex air, ex defense were up 7.1%. Granted, over the past 12 months, this number has been somewhat weak coming in at an average of 0.2% versus a long-term average of 3.45%. Since January 2010, however, the average has been 8.17%, far higher than average.
What, then, has been the biggest drag on real GDP growth over the past three years? Government spending. The government spending component of GDP, which accounts for government spending at all levels of government, has been pretty much dead flat since 2009. The average quarterly year over year growth for government spending is 0.92% since January 2010 versus a long-term historical average of 7.2%. Media notes to the contrary, the private sector in the US , while not experiencing the most robust recovery in the history of the country, has performed reasonably ok. On the other hand, the media spends a lot of time talking about austerity on the European continent. Austerity seems to be alive and well in America too, a good or bad thing depending on where you sit in the economic and political debate.
Nonetheless, it’s a reminder that retail sales, durable goods, and other economic numbers require a broader perspective. In total, the economic/business press is great about whipping up sometimes dramatic headlines about short-term, noisy statistics without placing them in a longer-time-frame context.
