Weather and other factors have caused retail sales to bounce around, but on a year-over-year basis consumers are still doing OK, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We had some weak data this week, and I'm here with Bob Johnson, our director of economic analysis, to see what it means for the state of the U.S. economy.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: So let's start with the retail sales data. This was weak again, and maybe this doesn’t portend good things for first-quarter GDP?
Johnson: Well, absolutely. I mean, I think that everybody's very worried. Consumption's the key driver of U.S. growth right now. With exports and business spending kind of out of the question, out of the picture here, everybody's focused on consumption. Certainly, the retail sales report today was not great news for that GDP calculation. So we're clearly expecting a low GDP number in the first quarter compared to the fourth, and a big part of that will be retail sales, along with the auto sales that we heard about last week.
Glaser: So let's look at the headline number. How much of this was driven by declining auto sales that we had discussed before?
Johnson: Well that was part of the number, but let's put it in perspective. The auto sales are calculated separately, and those will be done from the sales reports that we get out of the industry that we got last Friday. That’s what the government uses and so this number is just window dressing, and so that’s why we always toss the auto sales number out. But the headline number was down and down pretty significantly, because the auto sales number was down in March. Again that’s part of--the actual auto sales were down in the report last Friday. So that will be another thing that impacts the consumption numbers in the first quarter.
But, it wasn’t all about autos, either. I think what's happened now it's been very volatile set of winter months. And we have this where weather is good, weather is bad, and it's really kind of messed with the numbers. And it does a lot of years. It creates this thing where sometime you have really great January, but then a better February, but not so good March and then you have the patterns different each year because of how the weather falls and how the calendar falls relative to holidays.
So anyway, where we are at right now, is we had a decline in January where retail sales ex the autos and ex the gasoline were down a tenth of a percent. We had a huge February--probably an artificially large one--when sales were up 0.6%, that was a revision up from the prior report by the way. And then we got kind of a mediocre 0.1% month-to-month growth in March. So you add them all together we're at about six tenths for the quarter and that compares to about 1.3% retail sales growth in the December quarter. So you can see we've kind of cut the consumption number of goods, which comes off of retail, by about half.
Glaser: But does that big decline mean that the consumer's really in trouble; that there has been a notable pullback?
Johnson: Absolutely not. And I think what you really have to look at is the year-over-year data. We've said many times that the seasonal factor is really not only weather. But there are few other things that have kind of messed up the calculation on the seasonal factors. And the first quarter has always been unusually low consumption for three of the last four years. So we're kind of like, well, you know, weren't we supposed to seasonally adjust...?
So, anyway, that’s the big issue here. You look at the year-over-year data, by the way. Do a three-month moving average; exclude the autos, exclude the gasoline; and we have been between 3.5% and 4.1% retail sales growth every month in the last 13 months, which I think is a pretty incredible track record of stability. And I think that's the right way to look at numbers.
If you look at the numbers on that basis, the average is about 4%, and we were at 4.1% on a three-month moving average year-over-year basis now. So, again, certainly no reason to panic. It's certainly not going to do wonders for the GDP calculation, but we all are beginning to learn like, let's not pay too much attention to the first-quarter GDP number.
Glaser: So, you mentioned autos as being one weak point and then how you toss those out. But what else in the report kind of drags things down? What else was weak?
Johnson: Yeah. Disappointingly, restaurant sales were off about eight tenths of a percent month-to-month and you'll recall that’s been one of the really strong categories until the last three or four months when it started to go all over the place. It will be up almost 2% one month, and down almost 2% the next month. So it's been an exceptionally volatile series after pretty good stability. And it's one of our kind of leading indicators is looking at restaurant sales.
So, we are kind of disappointed with the number this month, but it follows, like I say, a really strong February. So we are not panicking just yet, but we will keep an eye on that number. But that was one of the major weak categories out there. Clothing was down. Again, that was a weather-related thing most likely. We really haven't gotten spring weather in the Midwest and the Northeast yet, and so people aren't buying the next season's clothing yet. So that's weighed on some of the data. So they just can't catch a break for the apparel people because recall we had a really warm January. So nobody bought winter coats and now we've got a spring where nobody is buying the spring stuff because the weather isn't just right for doing that yet.
Glaser: Then what looks stronger?
Johnson: Healthcare, or namely drug stores, looked a lot better. We don’t know if people were particularly sick, although that doesn't appear to be a likely explanation because the weather was relatively warm and sickness seems to correlate a little bit with that. So we are a little bit confused about why that number looked so good.
Building materials looked very good. So people are spending more, I think, on remodeling and so forth. So that was certainly good news. And department stores--I mean, not department stores, general merchandisers in general, with the exception of department stores, did very well. The Costcos, Sam's, and so forth were up 0.5%. So that was kind of a bright point. So it wasn't a uniformly bleak report. It was kind of a half and half, up and down, but just some of the key categories were down, and that's got people a little bit worried. But I wouldn’t worry because on a year-over-year basis, we are still doing pretty well.
Glaser: These numbers are also all nominal, but also you have to wait for some of the inflation data to come in to really see what's happening, too.
Johnson: Absolutely. We'll be able to make that judgment pretty quick when those come out, but again we've seen sometimes when closing prices were way down and when they are way up, and so maybe the apparel sales won't look quite so bad when we adjust it for deflation or whatever may have happened in the month of March.
Glaser: Let's briefly look at two other reports from this week. The first being the small business confidence. Do small business owners still kind of feel that squeeze of not being able to raise prices, but having to pay higher wages?
Johnson: Absolutely. I mean the overall index was statistically flat about 92.6 with the previous month, but it's still well below the 100 average that we saw in the 2014 timeframe. So, clearly, they are less confident than they used to be. Certainly, we continue to believe the biggest aspect of that is, if you look at the data that many, many businesses are having to decrease what they're selling their goods for, at the same time they're having to pay more for their employees and that's creating a profit squeeze, and you can see in their profit expectation numbers, too.
We've called that the canary in the coal mine, because we think that this squeeze between not being able to raise prices a lot, at the same time you've got budding labor shortages which are forcing wages up, it showed up first in small businesses because they are most vulnerable. But I think the data will eventually show up in big corporations in terms of lower profit margins in the years ahead.
Glaser: We also heard from the IMF; they downgraded their view on the global economy of this year and next. Any big surprises there? Is this more of them just catching up with reality?
Johnson: I think they are more just catching up with the reality. I think they were a little bit behind and again, they only do this so many times a year, so you can't exactly blame them for it, but they had thought we'd grow it 3.4% a little bit more than they grew in 2015. But now it's kind of 3.2%, which is kind of more of the same.
It was kind of...the bad news was it was kind of a broad range--you know, be it an emerging market, be it a developed market, most of the categories were down. It wasn't kind of like one bad number drove the index down as it sometimes does. About the only good news, I think China's growth was actually moved up just infinitesimally, but certainly that's a big number in the data that looked a little bit better and it certainly kind of squares their better purchasing manager data that we've recently seen and the better export data we saw earlier in the week. So China is not even by their statistics in any kind of a freefall just yet.
Glaser: Well, Bob, thanks for your take on this data today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
