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By Jason Stipp | 04-13-2011 01:37 PM

Consumers Fight Through Inflation Headwind

Retail sales are holding up in the face of higher commodity costs, but inflation will dial back GDP growth, says Morningstar's Bob Johnson.

Jason Stipp: I am Jason Stipp for Morningstar. We got government retail sales data for March on Wednesday. It showed a top-line 0.4% increase in the retail sales for the month of March, but there's certainly more to the story than just that top-line number.

Here with me to dig into the details is Morningstar's Bob Johnson. He's our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So we did see 0.4%, that was an increase, that was the top-line number.

It was on the top line a slowing of growth than we had seen over the last few months, but there's more to the story than just that top line number. What we're looking at in the report?

Johnson: It's always a very complicated report to analyze. This is the government report and includes restaurants, which is a typically a services thing, the stuff you actually buy in the store, the stuff you get from non-store places like Amazon.

So, it's a pretty comprehensive set of numbers, and it's very hard to analyze. So, the way I like to look at the number is let's exclude autos, which are captured somewhere else we've talked about, and gasoline, which really kind of inflated the number this month.

Stipp: Sure, because of the inflation that we've been seeing in the commodities.

Johnson: Exactly. So, looked at that way, retail sales have gone 0.9% growth in January, 0.8% in February, and 0.6% in March, so a little bit of slowing in trend, but those are really pretty phenomenal numbers on the surface. Even the 0.6% annualizes into over 7% of growth, which is pretty compelling.

Stipp: So when you strip out some of those more volatile things like you'd mentioned the autos and the gasoline, what are the consumers spending on, then? What is making up that 0.6% growth in those other areas?

Johnson: A couple of categories were particularly strong, and I'm going to put them in two ways. One was housing and one is going to be in the restaurants.

On the housing side, I've been waiting for this to happen for sometime. As people don't move, I've been waiting for them to spend more money on the homes that they already own, and we finally begin to see some of that this month.

The building materials category was up 2.2% on a monthly basis; so it annualizes into a huge number if you start multiplying that by 12. It's a volatile number, but that's a great number.

Furniture was up well over 3%. People are finally beginning to spend to furnish their homes. So people aren't moving, but they're spending more on what they already have.

The second category I'd like to talk about is restaurants. And we've talked about restaurants again and again, and for so long it was like, "sorry, Jason, they are not up this month," but we've had two good months in a row--1% growth this month on top of the 1.8% last month.

So, consumers are beginning to spend again. I always talk about not liking the reported confidence number, but I like to watch little fun things on the side, and certainly people have been more willing to go out to eat, and that was a really nice number to see for a second month in a row that really indicates that we've got some confidence and really maybe this oil thing hasn't begun to bite yet.

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