Shopped Out: Behind the Retail Sales Growth Number

Last Week
We had weak reports on retail sales and manufacturing output in the U.S. last week, while inflation measures remained elevated. Reports from Europe also indicated new weakness there in recent months.

Consumer. Retail sales declined a modest 0.1% in July. Significant weakness lies behind the headline number, however.

Sales at gas stations have been sharply boosted by higher prices, and higher food prices have also pushed nominal sales higher at grocery stores.

Taking those two categories out of the total, here's what retail sales growth has looked like in recent years:

This year's sag in retail sales growth excluding gas stations and grocery stores reflects real economic weakness--particularly in light of a report from the Department of Transportation last week that indicated a significant decline in vehicle miles traveled in the United States this year.

Consumer sentiment increased in each of the last two months, according to the University of Michigan's survey index, but the gains in the index were modest and have arisen only after a historic plunge in the past year. Here's a look at the overall index since 1978; recent results have been "bettered" only by the dismal readings in early 1980:

Manufacturing. The Federal Reserve reported that its industrial production index rose 0.2% in July on a seasonally adjusted basis. While manufacturing output has been holding up relatively well in the face of the weakness in housing and related consumer durable goods industries, the July result was artificially inflated a bit by the resumption of strike-impacted motor vehicle output. Overall industrial production growth has weakened significantly this year, with the trend in the six-month moving average turning negative. But the growth rate in industrial production this year has not been as bad as it was in the 2001 or 1990-91 recessions, which echoes results from purchasing managers' surveys:

Overall/Inflation. The Bureau of Labor Statistics reported that the Consumer Price Index came in nearly 6% above its year-earlier level in July. This was the largest year-over-year increase for a given month since 1991, and before that, 1982. In the past three months, the CPI has risen at an annualized rate of nearly 11%.

In a survey of CEOs conducted by NYSE Euronext, 90% of respondents described the economy as "fair or poor," up sharply from 16% a year ago. This survey's responses came from 184 CEOs from the U.S. and 70 from other countries. The CEO of  Dow Chemical (DOW), Andrew Liveris, commented that, "The U.S. now faces the terrible combination of high and rising commodity prices--inflation--with low demand. It's a situation we've not seen in the U.S. since the 1970s, and it makes for tremendous uncertainty."

Europe. A variety of indicators have pointed to new weakening in economic conditions in Europe in recent weeks.

The 15-nation economic statistics agency Eurostat estimated that the eurozone economy contracted in the second quarter of 2008. This was the first decline in quarterly output since the data for the eurozone were first put together.

Germany had been a source of strength within Europe during 2005-07, but the measure of economic output within Germany declined in the second quarter as well.

Eurostat reported a larger year-over-year decline in its measure of industrial production in the region on Wednesday last week.

The British Chambers of Commerce, an association of small businesses, released a quarterly report in which it expected two to three quarters of flat to negative GDP growth in the U.K. This was the weakest expectation in that report in the last few years.

The index from a survey of manufacturing enterprises in France indicated that manufacturers' confidence in future growth fell to its lowest level in five years.

This Week
Housing. The National Association of Home Builders releases its survey of members on Monday. Will the results improve upon a modest recent uptick? The Department of Commerce report on housing starts comes out Tuesday. Starts have plunged in the last year.

Manufacturing. The Philadelphia Federal Reserve Bank releases its survey of regional purchasing managers on Thursday. Will manufacturing continue to hold up relatively well, as it has in the economic slowdown this year? Exports have been a big part of that, but recent reports suggest economic growth has slowed to a greater extent worldwide.

Overall/Inflation. The Bureau of Labor Statistics reports the Producer Price Index on Tuesday. The PPI had been showing sharper inflation rates in earlier processing stages; one thing to look for is whether the higher rates in commodities and intermediate goods are feeding into finished goods prices.

The Conference Board releases its Index of Leading Economic Indicators on Thursday. The Conference Board has been a bit cautious reading a recession signal from the modest declines in the index in recent months; it will be interesting to listen to its characterization of the data on Thursday.