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Retail Sales Not as Bumpy as They Look

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the retail sales report for July this week, and it looked very good. Was it too good to be true?

Here with me to offer some insight on that report is Morningstar's Bob Johnson, our director of economic analysis.

Bob, thanks for being here.

Bob Johnson: Great to be here.

Stipp: Before we dig into the report and put it into some context, let's just talk about the actual number, 0.8% growth; that's a pretty good number. How does that compare and what did it look like underneath? How did the categories do?

Johnson: Well, the overall number, at 0.8%, would be one of the very best numbers of the recovery. It was a very good number and looked very good compared to the previous two months, May and June, which had both shown actually a decline in consumer spending. Some of that's oil-price related, but those two months were down and down relatively meaningfully--almost recession type levels. And the number this month was a clear pop-back in the other direction.

Stipp: So would you characterize this as a bounce-back from those two months [May and June] that maybe looked worse than they actually were, and this is just a correction, and the longer period is a better guess?

Johnson: I think the longer period, when you put the three months together, is a lot better guess. And I think if you did that, you'd say things were continuing a slow, painfully slow, recovery--that things aren't booming, but that we are seeing some improvement.

There were a lot of reasons why the numbers came together in the individual months, but I think that when you look at them in a longer context, we're doing OK.

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Stipp: So you doubt that we collapsed in May and June and then had a  gangbusters recovery in July?

Johnson: Exactly. Our analysts talk to store managers all the time, and they are not telling me that, oh things are booming or busting, or that June fell apart, which the data says, and then there was an absolute boom in July. It just didn't happen. I think the two months are both relatively slow months.

Stipp: So, maybe there is a little bit of noise there, and you want to look at those three months together. But we can look at the report, the July report, and look at the segments underneath and see, was it broad-based or were some areas really responsible for most of that gain? When you look at that, what do you see there?

Johnson: The one thing that was pleasing there on a month-to-month basis is that it was so across the board, almost like somebody had laid down a ruler. The average was 0.8% across all the categories. And that's about what most of the categories were. There are just a handful that differed by that from very much. I think groceries was up 0.3%, and we can talk a little bit about that. That was probably the lowest-performing group overall. And then you had a couple of areas doing really well. Furniture ... has been slowly creeping up because of better housing starts. And those were probably the two biggest surprises on the top and the bottom. But most of the categories were very much near normal.

Stipp: So, you did mention groceries there, and there could be some noise that we need to think about when we look at that grocery figure. What's the story behind groceries? I know there have been some worries about food inflation going up--maybe we don't see that yet, but you might expect groceries to do a little better, right?

Johnson: Yes. The one think that's very odd about groceries and about this particular report is that the Census Bureau calls a store a certain type of store. Target is called a "department store" in their statistics, and Jewel, our grocery store here in Chicago, our big chain, goes in the "grocery store" category. But now Target's begun selling groceries in a very big way, and that's becoming a meaningful portion of their sales, but it either goes in one bucket or the other. They don't go through with a ruler and pencil half of the sales into one category and half into the other.

Stipp: So Target's grocery sales aren't really counted as groceries; they are counted as department store sales?

Johnson: Right, at least for the purposes of this report.

Stipp: OK. And is it the same with Walmart as well?

Johnson: Absolutely.

Stipp: So, why does that make a difference, though? Groceries are going to get counted one place or the other. Why does it make a difference that they are counted in department stores versus grocery stores?

Johnson: So some of the volatility in the month-to-month numbers obviously makes a difference, because people may say, oh gee, grocery sales are only up a little bit. Well, probably some of it did fall in the other category.

But the other thing is, especially when you're looking in the month-to-month report--not quite as much on the year-to-year--but on the month-to-month reports, the seasonal factors for grocery store and department store sales are exactly opposite. People buy a lot of steaks, do a lot of grilling out, do a lot of entertaining in the summer, and grocery bills tend to go up and up relatively big. So the seasonal adjustment factors divide and shrink down what's actually reported by the grocery stores. It's just the opposite with the department stores: Everybody is out on the beach. They are not buying clothes. They are not doing the stuff they do in department stores in July--it's the worst month of the year. So they take whatever they do in department stores and add something to the number for July.

Stipp: I see. So the fact that we're getting more grocery sales in that department store [category] is making that look probably a little better; groceries look probably a little worse because of that mismatch there.

Johnson: Exactly.

Stipp: So, let's talk a little bit about trying to get some of the noise out of the data and look at it more broadly. So we mentioned over these last three months, you probably should combine them to get a real sense of what retail sales are doing because we saw some worse-than-expected data in May and June and better than expected in July.

When you look year-over-year, what kind of trend are you seeing in retail sales to get a broader view of how we're doing here?

Johnson: Without adjusting for inflation and tossing out the gasoline, which is really volatile, and tossing out the autos, which I usually analyze separately in some detail, we've been in a 4% to 6% range, and ... even with this month's really good piece of data, the fact that we had some slower numbers earlier in the summer kind of messed up the trend. So we are still on a slight downward trend. We're bumping the bottom of the range, the 4% year-over-year growth, and it had been over 6%. So it has come back in, but it's showing signs of flattening out, and maybe in the months ahead, it begins to look a little better again.

The numbers don't look quite as bleak if you adjust for the effects of inflation. A year ago, we had 4% inflation and now we are under 2%. So if you start making those inflation adjustments, all of a sudden it looks like the fall-off is from 3% to 2.5% instead of being from 6% to 4%, which sounds more dramatic.

Stipp: So a little bit of slowing, but not dramatic slowing. But even still, with the consumer being such a big part of the economy, are you worried about the slowing, or do you think that we will be bottoming out here and then we'll have better days ahead?

Johnson: Well, I liked this month's number. I like the fact that the trend looks like it's bottoming out. And I think the news looks good for the consumer as we look ahead. There has actually been some very good news for the consumer. I think number one is [lower] inflation. Besides inflation, we've got a better stock market, home prices that are starting to go up, year-over-year employment growth that's running about 1.8%, and anecdotally I'm hearing here in the office, everybody is refinancing their home right now at these record low interest rates, and I think that's beginning to have an effect on some of the numbers, too. So I think a lot of things are looking up for the consumer.

Stipp: So it seems like two takeaways: The consumer has a nice package that might give them a little bit of tailwind to pull out of the lower end of the [consumer spending growth] range that you're seeing, and I think the other one is, don't rely on one month's data in retail sales--and probably a lot of other data sets--and make all your conclusions based on that.

Johnson: Absolutely.

Stipp: All right, Bob, thanks for joining me.

Johnson: Great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.