Is Something Wrong With Retail Sales?

Jason Stipp: I'm Jason Stipp for Morningstar.

We got retail sales data this week, and it disappointed a lot of market watchers. Morningstar's Bob Johnson, our director of economic analysis, is here to give us his take on the report and why it might not be as disappointing as it seems.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, before we talk about the specifics of the report, I'd like to talk to you,  first of all, about what were the results of this particular retail sales report that disappointed, and then how do you look at the report, and why wasn't it as disappointing to you?

Johnson: Well, this is the government's most comprehensive report of retail sales, and it includes autos, it includes gasoline, it includes restaurants. There is almost no other report that has all of these rolled up into one. And it comes in the middle of the month, and so people like to use that to predict what the consumption number is going to be, and that doesn't come out for another two weeks yet. So, this is the first, early read on how the consumer is doing, and that's why people like to look at this number.

Stipp: So it sounds like there's a lot of stuff thrown in there. What was the number that disappointed people, and how do you look at the number, how did you gauge the report?

Johnson:  The headline number was, we got 0.4% growth. People were looking for a full 1%, but the big deal is, that includes the auto [sales]. And if you stripped out the auto, the numbers performed better than expected in retail sales in most categories. So, the report was very positive. Everybody was characterizing it as weak, and the auto market was falling apart, but it's not.

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Stipp: And you also look at the report on a year-over-year basis. What are those numbers telling you, when you're comparing them to the same period last year?

Johnson: When I look at the year-over-year numbers, we have been for the whole year, between a range of 5% and 6% on year-over-year growth, and that strips out all the weather stuff, and autos [being] good one month, and something [being] bad another month.

We've been in a 5% to 6% range. This month we were at 5.4%. So, again, as I'd characterize, it we're not booming, we're not busting. We're kind of in a steady state, 5% to 6% rate.

Stipp: Sort of staying on that trend.

You mentioned the autos were one of the things that dragged the number down for the most recent reporting period. Is this the same auto data that you look at? What are some of the differences there? And why might autos have been weaker?

Johnson: A very good question, because the primary disappointment, as we said earlier, was that people were expecting a 1% growth number, and we got 0.4% instead, and the sole reason was autos.

Autos are reported a couple of different ways. I think, they get their data in this report from dealer reports, whereas the auto manufacturers construct the data that we see the day after the end of the month--and those, by the way, are the numbers that the government uses to calculate the consumption report, the GDP report, not this number. This number is kind of a wildcard. We all are a little bit unsure where this one comes from, but we know that we set almost a new record for this recovery in January for auto sales.

Now some things that might affect it? Well, we get the overall auto number, and that's what was so strong [for January]. Maybe some of it was fleet sales, maybe there was a little discounting going on, maybe there were some small-business purchases that didn't flow through the [retail sales] data set. But the big auto number, looking across the whole economy, we know did very well. The part that went to retail, we can't tell. This [retail sales] report would suggest maybe it was a little bit more fleet oriented, but even there our team went back and looked at the data and said that retail sales looked pretty good as well, though fleet sales were strong.

Stipp: So, just looking at this number alone, certainly no reason to panic over the state of the automaker recovery at this point.

You mentioned something in there that's interesting about the discounting. This [retail sales] report is not inflation adjusted, and I think that can also have an effect on what we see on the bottom line of the retail sales. So, when you look at it, can you say, "well, volumes also went down," or do we think that maybe some pricing just went down, but volumes are still pretty healthy?

Johnson: Well, it's fascinating, because this report does not adjust for inflation, and the one we get at the end of the month, the consumption report, does. So, it's always interesting to compare the two to see what happens. And there are oddities in that report, and certainly we just mentioned that auto pricing may have been a little bit more aggressive this time, and that may have hurt the [retail sales] number, because if they sell the same number of cars, but at a [lower] price, that affects this report. It makes it look smaller. But they adjust it back for the CPI at the end of the month, so maybe it won't look so bad.

Then you get ... real anomalies, like the electronics business; it almost always looks like it's down in this report, and people think, "How can electronics be down?" Well, keep in mind, computers and all that stuff comes down every month--the prices of TVs and so forth. And then, again, they adjust that back up to the price level, and so that negative can turn into a positive by the month-end [consumption] report. So that's what makes this report really tricky.

And then you've got gasoline in this report, which makes it volatile, and people tend to buy about the same amount of gasoline every month, but you won't know it from reading this report, because the number jumps all over the place with the price of gasoline, which again is not inflation-adjusted for this report.

Stipp: If you stack up recent inventory data that we got, would that seem to suggest that we're seeing a slowdown in the actual volumes that are moving through stores or not?

Johnson: You hear all this because of the GDP report, which showed inventories were a little higher and they contributed to the GDP growth. But when you really look at the numbers, and you compare sales growth to inventory growth, we are still in very, very good territory. In fact, the inventory-to-sales ratio is kind of flat at 1.18 and is in fact lower than the 1.21 that we saw a year ago in the retail category. Some of the other categories look even better.

So, I am not worried about inventory. Yes, inventories are up compared to where they were, but sales are up even more. So, you just can't look at inventory in isolation. Maybe there is an extra small tick in clothing and maybe an extra tick in terms of growth in department store inventories. But those were the only two categories that I really saw that looked like there is anything at all negative happening in inventory. So, things are pulling through. Maybe they have to sell [merchandise] at a lower price, but retailers are not letting stuff sit on the shelf--that's for sure.

Stipp: On that point, as well, you've written about how consumers are much more savvy now and they're really being discerning shoppers and finding those low prices. There is a lot of anecdotal evidence. Could that also be one of the reasons that maybe we see this [retail sales] number a little bit lower, because [consumers]are just buying things at a good cheap price?

Johnson: If [consumers] continue to outfox the retailers and buy whatever is cheapest this month, that's going to tend to bias this report on the downside. So, clearly, you look at this data, and I also, as you know, look at the data on a weekly basis, but that doesn't include gas and that doesn't include autos, and it doesn't include several other categories, but that number again also is in a steady state at 2.5% to 3.5% same-store sales growth. We get that report every Tuesday, and even the monthly version of that report is also quite strong.

Stipp: Then another thing that we do get in this report that's interesting to look at are the restaurant sales. What did those look like, and what does that say to you about where the consumer is mentally?

Johnson: The good news here is that restaurant sales were up 0.6%, and so you annualize that, it's [in the] 7%-8% range, and it's been more in the 4%-5% range. So, it's a good number for restaurants. And I like to look at the restaurant number because it's another gauge of short-term consumer confidence, and you know what I think of those silly consumer confidence reports that we get. But ... one of the things I look at is ... restaurant sales.

Now you have to be a little careful and compare to what grocery store sales did to make sure that there just wasn't some price things going on, but it appears that restaurant sales were high, which would seem to indicate continuing consumer confidence in the month of January, and that's so important because the consumer is 90% of the economy.

Stipp: Last question for you Bob. One of the other things that you pay attention to are the weather trends, and we've had a pretty mild winter for the most part. Wouldn't that tend to give the retail sales a little bit of a boost? Why maybe didn't that help us as much as you might have thought?

Johnson: Depending on the month and the week, it can have all sorts of effects. Now, we've had almost uniformly warm weather, and not a lot of snow, so that's enabled people to get to the stores, and to shop and not feel like they're freezing to death, and they have to kind of run in and run out. So, from that standpoint, it's helped. Also, warm weather means lower utility bills, and that means more money to spend on other stuff in the store. So, certainly, that's a positive aspect of warm weather.

But then on the other hand, you get this deal with warm weather and people won't like to buy gloves, and when they eventually do buy gloves and scarves, it's at 50%-60%-70% off on clearance sale. So, that's clearly one of the negatives of the weather. And now that since we didn't have such cold weather, and we haven't really got a burst of really warm weather, people aren't buying the spring stuff just yet.

Stipp: So, maybe consumers are not quite finding that merchandise that they want for what the weather is telling them right now?

Johnson: Right.

Stipp: OK, Bob. It certainly sounds like there is not enough evidence in this, what some folks considered a disappointing, retail sales report to conclude that demand is collapsing out there for the consumer.

Johnson: Absolutely. I think the consumer is doing just fine, and I think when we see the income numbers over the next few weeks and the inflation numbers, that will give us a little bit more of a clue of how much money the consumer really has to spend.

Stipp: All right, Bob. I'll look forward to checking in with you on that data when it comes out, but thanks for joining me today.

Johnson: Fantastic.

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