Jeremy Glaser: For Morningstar.com, I am Jeremy Glaser. This week we got the best retail sales report in five months. I'm here today with director of economic analysis Bob Johnson to take a closer look at the numbers and see if there are any downsides.
Bob, thanks for joining me today.
Bob Johnson: Great to be here.
Glaser: So let's take a look at the raw numbers first. What did retail sales look like in February, and is this about what you expected?
Johnson: Well, we grew 1.1%, the headline number for the month, which was pretty much in line with expectations. Keep in mind, it's a high number because it's month-to-month; that's the growth from January to February. To get to kind of a full-year number, you have to multiply it by 12. So we were up more than 13% if you annualize one month, which really isn't the fairest thing in the world to do. When you go back and look even on a year-over-year basis, you're up more than 6% on a year-over-year basis in terms of these numbers. This is a very healthy number and shows that retail and consumers are still alive and well.
Glaser: That's certainly a big boost, but how much of that increase was just higher gas prices, inflation, and other types of higher prices building up that number versus people actually wanting to spend more?
Johnson: I think there are a few ways to look at it. Let's address gasoline front and center. It was the fastest-growing part of the number. It wasn't because people bought more gasoline, it was because gasoline cost more. This report is not adjusted for inflation or price changes. So gasoline grew 3.2%, and it is a meaningful contributor to the index. That certainly was a help. The other really big help--one might call unnatural--was autos, which had a really big jump of more than 1%. That really helped out the overall number. That's partially because I think somehow the January numbers for cars didn’t get fully accounted for in last month's report, and it showed up in this month's report. We saw the auto numbers from the auto dealers, and those were clearly good in both months. So I think there was a little catch-up on the auto sector.
If you strip out the autos and the gasoline effect, we were still up 0.6% sequentially or about 7.2% annualized. Or if you look on the year-over-year basis, which is a good way to look at it, we were still up 5.8%. Both are very healthy numbers.
Glaser: Gas and auto sales look strong, but what other sectors performed well in the month?
Johnson: Well, the bigger question is almost what didn’t do well because only one category was actually down. It was kind of good across-the-board. But there was a lot of strength. We've already mentioned autos and gasoline, and apparel was one of the stronger categories. I can't quite figure out for sure why apparel did well. I'm going to guess maybe it was a little bit of discounting to clear out winter goods, and maybe some warm weather encouraged a few spring sales a little early. But the number looked a little unusually strong on apparel. Building materials also was good, up 1.4% month to month, but that might be because people are starting their gardening a little earlier and maybe doing a little bit of home fix-ups, too. That said, it was still another particularly strong category.
Glaser: Along the same lines of building materials, what about the construction industry? We've been focused on that with the housing market, so how did construction do?
Johnson: Well, at 1.4% it was one of the better growers this month. It was good to see, but there is a little question if that's all weather-related or not.
Glaser: Yes, exactly. We've had this unseasonably warm weather for a while across most of the country. Are people just pushing forward that consumption versus an actual newfound excitement for home improvement?
Johnson: That's an interesting question. The weather thing kind of weaved through in a bunch in different ways, and some of them are positives while some of them are negatives. I can't imagine we sold a lot of ski gear in the Midwest or a lot of down coats this year compared with other years because of the warm weather. The warmer winter certainly hurt a few categories. On the other hand, it was a lot easier to get to stores, and maybe it was easier to buy spring merchandise a little soon.
There's a lot of interaction in these numbers, but overall, I think they're still a very good, very healthy set of numbers, as you really kind of saw the strength across the board.
Glaser: We had a lot of strength there, and you said only one sector was down. But what really didn't have as strong of a performance in February?
Johnson: The one down sector was furniture as we still haven't sold a lot of new homes. We're getting better there, so maybe furniture picks up in two or three months. But that was one of the categories that was negative this month. Drug stores were slow. Again, with the warm winter, I think we had less of a flu season, so I think there were fewer people going to the drug store for cold medications. That certainly was a factor in that category. Then the grocery sector saw relatively minor growth, as people went out to eat just a little bit more last month.
Glaser: We talked about restaurants last week, and the jobs report showed there were a lot more restaurant employees. So it does seem like they actually are serving people who are going out. What's happening there? What's your take on restaurants?
Johnson: Yes, they did hire those people for a reason, I guess, when we saw the strong restaurant numbers in the employment report. Restaurant sales increased about 0.8% sequentially, which is a very good number for that sector. This is the one report where I get restaurants. I get the car sales some other place; I actually look at a lot of the merchandise sales from the International Council Shopping Center. The really new piece of data on this retail report is the restaurant business. It was good to see the growth there because I think that is a short-term indicator of consumer confidence. So I was glad to see that rise by 0.8%.
Glaser: Now, with all of this good news in the retail data, is there anything that concerns you? Are there any downsides that you think could negatively affect gross domestic product growth looking out over the rest of 2012?
Johnson: Well, certainly, I think one of the concerns about retail sales is that we buy things in stores, and a lot of things in stores are manufactured. Many of them are manufactured overseas, so, unfortunately, retail sales growth might translate into more imports rather than being necessarily a total help for the U.S. economy. The one dark spot in the report is that it probably means the import number is going to go up, and it's probably why we've been seeing some problems with the trade balance recently, again, after having gone through a number tame months.
Glaser: If those imports go bigger that's certainty going to hurt GDP. When we look at first-quarter GDP numbers, what do you expect the final number will be? I know, at one point, we heard some people talk about a potential of 1% growth in the quarter, which would be very anemic. What do you see there?
Johnson: I think it is going to be closer to the 2%. I'm going to stick to my guns there. I think, certainly people looked January consumption and said, "This is awful; the math just doesn't get to there." We suddenly had a month in February that was kind of off the scale in terms of goodness. I think January was probably a little understated, and people kind of trend-lined that instead of kind of looking at it objectively and asking what may have happened. I think, we will get much closer to that 2% target, based mainly on this stronger retail sales report.
Glaser: Bob, we know that you look not only at monthly reports but some data that comes out more frequently. What are you seeing there? Has this strong trend from February been continuing through March?
Johnson: That's a very good question. As we look through the numbers, I look at the weekly International Council of Shopping Centers. Last week in my column, I talked a little bit about that retail number was coming down. It certainly wasn't any kind of sell- or panic-type level, but it had two bad weeks in a row. The good news is that the third week, the one that ended last Saturday and we got the news on Tuesday, showed that we picked up again a little bit.
So we didn't go into panic mode, where we crossed the line of 2.4% year-over-year growth on a five-week-moving-average basis. It looks like last week, the retail sales number got better again, so I think we are in good shape for the months ahead.
Glaser: Is there anything else that makes you feel bullish about the months ahead for the consumer?
Johnson: Well, besides this report from International Council of Shopping Centers, there are a few things. Last week, we got the news out of the Federal Reserve about consumer balance sheets. We added well more than $1 trillion to consumer balance sheets during the December quarter, and the stock market has actually done better than that. So, I bet we've added another $1 trillion here in the first quarter. We've certainly put some buying power behind the consumer. I expect next week to see the financial-obligations ratio out of the Fed, and that will show, I think, again, that what we spend on our mortgages, on our credit cards, and so forth is down yet again. This will free up more buying power for the consumer.
And then on top of it, as we talked about last Friday, we've had three months in the row of growth in excess of 200,000 jobs. When you are increasing the jobs, increasing your confidence, and seeing low interest rates, that's not a formula to cause sales to go down. I think we are looking for a couple of good months here.
Glaser: Great, Bob. Thanks so much for talking with me today.
Johnson: Thank you.
Glaser: From Morningstar, I am Jeremy Glaser.