Not Much for Bulls or Bears in Retail Sales

Note: While Bob Johnson is on vacation, we are featuring this video interview in place of his Jan. 18 column. Bob's regular column will resume Jan. 25.

Jason Stipp: I'm Jason Stipp for Morningstar. The government's retail sales report released on Tuesday improved the market's mood after a disappointing employment report last Friday. But Morningstar's Bob Johnson, our director of economic analysis, says it's really just more of the same. He's here to explain.

Thanks for joining me, Bob.

Bob Johnson: Great to be here today.

Stipp: The retail sales [for December] came in at 0.2% growth month-over-month, and people seemed to receive that report well. Before we talk about the components, though, this is an important report to look at. The market looking at it so closely is merited.

Johnson: Yes, absolutely. Especially after Friday's job report, everybody thought maybe the economy is really falling apart, or maybe December retail sales will really be horrible. As it turns out, the [retail] numbers were probably just a little bit better than people expected. Maybe they were looking for 0.1% growth, and we got 0.2%. … The employment report was the worst number in three or four years, so [investors worried that] maybe we were going to see this in the retail report. So, this was reassurance to the market that the whole thing wasn't falling apart.

Stipp: It offered a little bit of relief, but when you look at the number closely, you say, really, this is about the same kind of retail sales performance that we've seen. It's on the trend that we've seen over the last year or so. Why do you say it's really just more the same?

Johnson: I like to use a three-month moving average. That takes some of the weather effect out of [the data] or an unusual event, … . [And using year-over-year instead of sequential data] also gets rid of some of the seasonal factors that are in the numbers, because the seasonal effects change as people's shopping patterns change, and they buy groceries in department stores or whatever.

So, [year-over-year, three-month average data is] what I really like to look at. And we grew 4.1% on that basis, excluding autos and excluding gasoline. And that's the same as the average has been for the last 12 months. It's been in a range of 3.6% to 4.5%. So, we've stayed in a very narrow range; we've stayed within that half a percent band on either side of 4% since all way back to July 2012. So, when people say things are rocket-ship improving, that this is much better, and everybody's feeling better and going to the store--no. It's more the same.

Stipp: It's actually still in the range that we've seen, and in fact, right in the middle of the range.

Johnson: Correct.

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Stipp: If we pick this report apart, we see some interesting variations in the underlying trends. If you take autos out of the equation for this report, the retail-sales report looks better. So autos were a headwind?

Johnson: Autos were a big headwind. Recall that we went from 16.3 million units down to something more like 15.4 million in one month. I thought the autos number might even be a little bit worse, because I didn't know how much was going to get allocated to business and how much to the consumption number. But in any case, if you take autos out of the equation, we grew about 0.7% month-to-month, and that's what probably really got people excited.

Stipp: What were some of the other underperformers in the report, things that did not show an increase?

Johnson: Building materials didn't do well. Some people are saying, maybe there was less construction, maybe people don't buy stuff so much during the holidays. I'm not buying it. They should have been out buying snow blowers and their holiday trees, and that stuff comes from building materials store. So, that was probably one of the bigger disappointments in the report. I will note that November was pretty strong, so maybe it was just payback for that number.

Electronics was also weak. Part of that is always due to pricing. Probably there were even more [discounts] given on pricing, especially on TVs.

Stipp: This report is not inflation adjusted.

Johnson: It's not inflation adjusted, so when prices come down, it makes the volumes go down. Furniture was another weak category, as we've seen some slowing in the housing market. Those were the big four that really had a pretty healthy decline.

Stipp: On the plus side, something that had a very healthy increase that you don't expect to see continue is food.

Johnson: I saw that locally. Everybody ran to the stores the last couple of days of December anticipating the record cold spell that we had here in the Midwest. I went on New Year's Eve to find some milk, and all the milk was sold out. The store looked like a war had hit, and certainly that helped the grocery sales, which were up the most they've been since like 2006. It was a huge number in grocery that won't recur and will probably hurt the number next month.

Stipp: Apparel, a place where we actually saw a lot of hiring--maybe unexpectedly--did do a little bit better here in this report.

Johnson: I have been worried about all the apparel hiring, but maybe it was justified after all. The sales in apparel were up something like 1.8% in a single month, not year-over-year, and that's a pretty big number. That's weather-driven. People had to buy their gloves, their heavier coats that they hadn't needed for many years with warmer winters, and now with this really cold one, I think people had to go and restock their winter wardrobe a little bit. That did help the number.

Stipp: But it may not be sustainable growth if people are just stocking up on some of those winter outerwear essentials.

Johnson: Absolutely.

Stipp: Eating out, which is a good sign of a certain level of confidence, also showed an increase.

Johnson: I like to see the restaurant number go up, because that's one of the shortest-term indicators of people's confidence and their mood. That number was up 0.5%. So, I was pleased to see that.

Stipp: Gasoline sales showed an increase, but that's something you don't want to see because of discretionary income.

Johnson: Right, because all of a sudden, if [consumers are] spending on gasoline, they can't go into the stores and spend it on other items, so that one is certainly not a particularly good thing to see.

I think that number was probably a little bit inflated by one other factor this time around. There actually might have been more unit volume as people rushed to fill their cars and top off their tanks, again, before the record cold. So that certainly helped the number. … This report was definitely helped by weather; there's no doubt about that.

Stipp: Let's look back at the holiday season in total. There weren't very high expectations for this holiday season. How is it looking at this point like the holiday sales came in?

Johnson: I look at the overall sales--not the same-store sales that we talk about once in a while--and we were up about 3.9% year-over-year. That's November and December combined compared to November and December of the previous year. That excludes autos and gasoline to keep that out of the equation.

Unfortunately, that's the worst number since 2009. The trend has been down. We'd been up over 5%, and now we're under 4%. So again, not falling apart necessarily, but for people who say, oh my goodness, things have suddenly turned the corner and are getting better--no evidence there.

Stipp: But when you look at the data from the fourth quarter, it looks like consumption will have shown improvement over the third quarter.

Johnson: The third quarter had a couple of months of softness. So, the fourth-quarter consumption GDP calculation will look a little bit better than the third. Some of that will be offset by the auto data. But when I put it all together, consumption will be a little bit more faster growing in the fourth quarter than the third, and that will offset some of the weakness that I am expecting from a big inventory adjustment going away in the fourth quarter, but it won't be enough to offset all of it.

Stipp: Let's look ahead into 2014. You have some worries, potentially, about retail sales, which would also imply some worries about consumption as well in the GDP. What are some of the reasons why you're keeping a close eye on retail right now?

Johnson: The unemployment benefits being cut back in terms of number of weeks, which immediately put 1.3 million people off of the unemployment rolls. There's no view that that's going to get fixed anytime soon. That's certainly going to start weighing on the numbers very quickly.

I've got two weeks of data from the International Council of Shopping Centers, and it looks like January is off to a weak start.

We've got higher deductibles on health insurance, and we've got higher insurance premiums, which will begin to affect the consumer.

And also because they're spending more money on heating their homes and on gasoline and so forth because of all the cold weather, that will be money they can't spend on other things.

And the bad weather might put more people online. So the brick-and-mortar [retailers] might be particularly hard hit.

Those are the reasons I'm a little cautious about the retail sales, especially here in the first quarter.

Stipp: So the good news is, retail sales numbers indicate that things aren't falling apart. The bad news is, we are not really seeing any kind of escape velocity. It's really more the same. And in addition to that, a few yellow flags to keep on the horizon for retail sales.

Thanks for joining us and giving us the rundown on retail, Bob.

Johnson: Great to be here today.

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