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July Retail Numbers Don't Tell the Whole Story

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Retail sales were flat in July from June levels. Is this a sign that the consumer is in trouble? I'm here today with Bob Johnson--he's our director of economic analysis--to take a closer look at the report. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with that top-line number. What did the July report show us?

Johnson: It was disappointing overall. It showed, as you said, no growth overall. Even if you strip out autos, which were down just a touch, we were only up 0.1%. Even my preferred method of excluding autos and gasoline showed on a month-to-month basis only a 0.1% improvement.

Glaser: That sounds not so great, but is this really the right way to look at that data from a month-to-month basis?

Johnson: No, I always think you need to look at the data year over year and averaged. There was about 4% year-over-year growth in retail sales, which is kind of where we've been--except for a brief period where we dipped in January and February where there were some weather effects. But that 4% is pretty close to what it's been for the last several years, and I really don't think there's any deterioration that's showing up in these numbers when you look at them the right way.

Glaser: That being said, the numbers have been decelerating over the past couple of months. What could be driving that? Is this a sign that there could be some weakness to come?

Johnson: I think you need to be really careful when you look at the numbers because retail sales is one of those tricky reports. It's so important because it is 30% of consumption, which is 70% of the GDP calculation. But this report is revised a lot, especially one month later. So, you really need to be careful looking at this data, because you could give it a good quick read, but it certainly gets revised often--even in terms of direction--the following month.

Certainly, there are seasonal-adjustment factors in there that mess it up as well. And certainly, July is a tough month; it's one of the lowest retail-sales months of the year for conventional goods. And so, that kind of messes up the number too when you've got these different, shifting seasonal factors. So, you need to be very, very careful when you look at these numbers, especially month to month. I think the year-over-year pattern makes a lot more sense.

In [regard to the month-to-month number], what happened is that we had a really strong spring. We had a bad winter, and then we had this huge spike. Of course, after that spike, things kind of slowed up a little bit. Then, you had a second factor in the headline number where gasoline prices and automobile prices have actually been coming down. One of the problems with this report is that it's not adjusted for inflation. So, if you include the gasoline and the cars in there, of course the pattern is going to look like it's down.

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Glaser: How do you think of this report in the context of the other economic data we've had (with an improving labor market, in particular)? Can you have declines in consumption while the labor market looks better?

Johnson: Well, it's highly unusual, and I suspect somewhere along the line one of the reports is wrong because the U.S. consumer is very good at spending most of what they have. Now, because of the bad weather, we've actually been through a brief period at the beginning of the year where people's earnings were up more than they were spending by almost a factor of 2 to 1. And so, I think that at some point that's going to begin to reverse itself, and I was hopeful that maybe we would see some of it this month, but we haven't yet.

I really do think that the consumer is in a pretty good position. And when their employment situation--their wage data--looks better, it usually means more spending. So, I don't know--maybe it means the August number will look unusually strong in terms of retail sales; maybe it means July gets revised. But when you've got employment and income doing quite as well as it is, something just seems a little odd with them--even the month-to-month data that suggests that maybe things are a little bit better than they actually look like today.

Glaser: Let's take a closer look at the report: In terms of categories, where aren't consumers spending? What was the weakest [category this] month?

Johnson: Certainly, the area that was the biggest concern is general merchandise--your Targets, your Wal-Marts, and all those kinds of stores. And that category was down 0.5% month to month, and it's actually not doing very well year over year. It's just up very modestly. And I think, certainly, some of that reflects the problems that you have at the big stores in that category. And maybe it's a little bit of a mix issue more than anything else. But certainly, Target [has had those] data-breach issues, and Wal-Mart has had its own set of issues--that's what may be really kind of holding those [retailers] back. And those are big components of the report. So, I'm thinking that might be part of what's going on here.

Glaser: Is anything in the housing market impacting sales?

Johnson: I think that’s another area: We saw electronics, appliances, and furniture all look a little bit weak in July--and that is expected, and that is real. We've had a little slowdown in the housing improvement, and I think that's probably holding back some of those categories. That's the one part of the report that was weak and probably deservedly so. It kind of analytically adds up, so to speak.

Glaser: And then what's doing better?

Johnson: On the better side, I think some of the health and beauty aid drugstores are doing better. Some of that, again, is probably related to some of the drug prices coming back up a little bit, which is probably not a good thing. I think because we've heard some reports from some of the drugstores at the frontend of their sales that the nonpharmacy stuff hasn’t done quite as well. So certainly, that’s one category that did, overall, do better. We also had clothing do better and grocery stores do better this month.

Glaser: Wrapping it all up then: What does this report mean for the consumer? Is there any change to your thesis that there should be improvement in the back half of this year?

Johnson: I think this month is an anomaly; the seasonal-adjustment factors make this a very tough month to look at in isolation. I think, at a bare minimum, the consumer continues to do as well as they had been. And, if anything, I think it shows a little bit of acceleration in my mind, despite all the headlines to the contrary.

Glaser: Bob, I certainly appreciate your analysis today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.