Jason Stipp: I'm Jason Stipp for Morningstar. We got the government report on retail sales this week. It showed a second monthly decline.
This is obviously a report we watch very closely--the consumer being a very important part of our economy.
Here with me to dig into the details and give his read on the report is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for being here, Bob.
Bob Johnson: Great to be here.
Stipp: So, we saw a decline, 0.2%. This was somewhat expected, though. What was your initial read on the report and the decline we did see?
Johnson: Everybody was looking for a decline, because this report, as we've said many times, is not adjusted for the effects of inflation. The price of gasoline has fallen dramatically for 10 weeks in a row here, and that means the sales at the gasoline stations were certainly an impediment to the overall report, and that's why everybody was looking for kind of a down number.
People thought the auto number might be a little softer, too, given that the new car sales were down last month a little bit, month-to-month, but on the other hand used car sales went up, so that was actually more of a help than people thought.
Stipp: So, it's important to think about the fact that prices being lower will affect this report, because people are spending less dollars when they are buying gasoline at the pump.
Gasoline, though, wasn't the only place where we saw some declines; we also saw drugstores declining. What was the story there?
Johnson: It's very interesting how it creeps into the system, but right now what's happening in terms of drugstore sales is that we've seen Lipitor come off-patent. I think Plavix either is or is about to come off patent, according to our analyst Matt Coffina, and so you've got a lot of those drugs coming off of patent and going to generics, and that absolutely kills the sales of drugstores.
I think one major chain might have mentioned that it was as much as a 2.5% hit to their sales growth rate just from one drug going off patent and going generic.
Stipp: So, it hurt those revenues for drugstores, but consumers probably like seeing those generics on the market.
Johnson: You're darn right they do, and it really helps control the prices.
Stipp: Another area where we saw decline is building materials. Now we had seen some traction in the housing market; why are we seeing building materials sales decline?Read Full Transcript
Johnson: Again that's on a month-to-month basis, sequentially, and the reason it fell off is because we had such good growth early in the season, when weather was warm and people bought their trees and their garden supplies one month, maybe even two months, earlier than usual, and they could really start on the planting. And now when the sales would usually come in May, they've already planted the stuff in the ground. So, that truly hurt that category…
Stipp: In May.
Johnson: In May.
Stipp: So, we pulled some of those sales forward, because of the nice weather we had early in the year.
So obviously we're seeing that inflation tapering off has affected this report, and that things are a little bit cheaper now. We got some more inflation data this week on the PPI. What did that suggest? This is a leading indicator for inflation down the road for consumers.
Johnson: Right. Producer prices were again down this month, on a month-to-month basis. They were down a whole percentage point. A lot of that was energy, but we were down a percent.
And keep in mind, on a year-over-year basis, [growth in PPI] is now down into tenths of a percent. I think it was 0.7% for year-over-year producer price index being up. That's for a full year, that's not a month. Back in September, we were looking at [year-over-year growth] of 7%-8%. So, we have dramatically brought down that rate of inflation. That's going to put a lot more money in consumers' pockets, and I think largely offset some of the export weakness that we're seeing in Europe.
Stipp: So, Bob, you mentioned the 0.2% decline [in retail sales] is a sequential decline. When you look at it more broadly, on a year-over-year basis, you're also seeing a bit of softness over a longer term. Can you explain that?
Johnson: Let me clarify, because it certainly wasn't a stunner in terms of being a great retail sales report. I think it was consistent with what we've seen as slow and steady growth, with maybe just a little bit of slowing in here. The average for the last year has been about 6.2% year-over-year retail sales growth, and this report came in at 5.5%.
Stipp: So a little off average.
Johnson: A little bit off average. I think it's the first since last July that we've been below 6% [year-over-year retail sales growth]. So clearly we have softened a little bit, and again some of that is prices. Now keep in mind that when we had that 6.5% growth, inflation was looking more like 3.5%. Now we're a little bit lower in terms of retail sales growth, but inflation, instead of being 3.5% or so, is 2.5%. So, that's what makes this number very tricky to determine, how that actually comes out. We are going to have to wait until we see the final month-end numbers from the consumption report, [and] those are inflation adjusted.
Stipp: So, Bob, we might have to wait for that report to answer this question, but obviously if consumers are paying less in the drugstore for the drugs that they are buying, or less at the gas pump, they have more money to spend on other things.
Do we have any evidence that they are spending money on other things, like electronics or in other areas, because they have a little more cash flow now?
Johnson: There weren't a lot of real strong categories in the report. And I would say that the one thing that was really strong was autos. And we've always said every month that auto sales, new or used, are strong. It seemed to affect restaurant and groceries, because people seem to cut back on their spending in other categories when they're spending on autos. So, autos certainly have been a good category year-over-year, month-to-month.
We've also seen furniture sales pick up, which is another long-term durable good purchase, and so people have less money to spend on some of the other things down their want lists. So those are all things that [suggest] there seems to be this trend maybe of spending on a little bit longer-term goods--which is good news, which indicates consumer confidence--and a little less spending on some of the other stuff.
Stipp: Bob, thanks for the report. It sounds like we are seeing a little bit of softening here, but certainly no reason to panic on consumer front.
Johnson: No reason at all to panic.
Stipp: Thanks, Bob. For Morningstar, I'm Jason Stipp. Thanks for watching.