Jason Stipp: I'm Jason Stipp for Morningstar. With a lot of market watchers still very jittery about the state of the economic recovery, we've had a few positive reports recently, and the question has to be raised: Is the possibility of a double-dip recession now fading.
Here with me to talk about his take on that and what some recent reports might mean for GDP in the back half of the year is Morningstar's Bob Johnson, Director of the Economic Analysis. Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So we have some recent more positive reports after what seemed like a serious string of negative reports for a while. An important one that came out this week was retail sales. Tell us a little bit about what you saw there and why you thought it was a good report?
Johnson: Yes. The retail sales number was a very good report this morning. If you'd strip out the autos and gasoline, the two more volatile numbers in the series, we were up five tenths of a percent and that has been our best number since March. And remember, that's a month-over-month, so that annualizes into something like 6%. So that was great number.
Stipp: We also heard from some individual retailers this week. There maybe were some interesting findings in their reports. What did you see on that front?
Johnson: Yeah. I think there were two and one was Best Buy, which I think really is a microcosm of lot of what's going on. Their sales were probably just a little disappointing and earnings were exceptionally good, and the reason is I think some of the lower-margin things maybe TVs and so forth and computers, low-end computers, were a lesser part of the mix, and you get Internet services, some of the cable things they sell with stuff, and the mobile devices, which tend to have higher margins, all drove the numbers, and so that caused the improvement.
And the other thing that was there is that U.S. sales were relatively flat, and they did better overseas. So it's kind of that phenomenon where the U.S. is kind of holding its own and the better growth is coming overseas. So those were the key takeaways from that.Read Full Transcript
Stipp: So foreseeing maybe a shift in a mix away from some of the electronics that seem to have been driving consumer spending before. What does that say about the imports because I know that we had been importing a lot of those consumer electronics and that caused our import number to be really high in the recent past? Are there any insights there about imports?
Johnson: Well, I think the Best Buy is probably an indication that some things are slowing, and TVs are one of the things I really like to see slowing because so much of the content is overseas. Some of the smartphones and so forth get a little bit higher U.S. percentage content, and they tend to drive services as well, which is U.S.-based revenue. So that should help on the import/export front.
And we had some good news last week on the import/export. So if you're trying to put together a package why we earned double-dipping, certainly today's retail report was one of them, last week's import/export report was another and this week's inventory report would be a third one.
Stipp: So speaking of inventories, first of all, how do those factors into GDP? And secondly, based on the recent inventory trends, what might that say about where GDP could be in the back half of the year?
Johnson: Sure. One of the things that they do when they calculate the gross domestic product is they – first of all, it's production; they are only interested in what's production. They don't really care whether it gets sold or not. So they go and ask all the stores what they sold, and then they add that up and then they go ask all the manufacturers how much their inventory changed, and that would be another thing that they add to the gross domestic product number.
So those numbers, when the inventory creeps up, is a good thing for GDP and probably a good thing for the economy. I mean Best Buy said that if their inventories had been higher of Apple products, their sales could have been considerably higher than they were. So you want to see inventories a little higher, you don't want to see them building up so there's mountains of stock in the stores, but you don't want to see them declining either because that's stupid.
Stipp: And the inventories had gone up a little bit, so that's not necessarily a negative thing longer term when you're thinking about the availability of having products on hand to sell them if the demand is there. So if you're looking at what the trend recently has been in retail sales and maybe what the inventory component might be, if we can sustain some of these trends, what might that say about where GDP might be, coming up?
Johnson: Yeah. I think that the bears that have been thinking maybe we could actually have negative GDP growth in the third quarter, the September quarter, or even some of those are in the 1% camp, I think those numbers are beginning to get washed out, and I think the numbers may look like more like 2%, 2.5%. Now, I've been at 2.5%; I'm going to keep it there, and I think the real positives here are the export drag will be – the net export, namely the imports – will be less of a drag and the retail sales report that we've seen, which is consistent with a 2% consumption growth and that's the biggest part of GDP and that will be actually higher than it was in the second quarter.
Stipp: So certainly the numbers are far, far from suggesting that we might be moving into a double-dip territory?
Johnson: Yeah, I think the news this week kind of put a further nail in that coffin.
Stipp: Right. Great, Bob. Thanks for your insights and thanks for joining me today.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.