Saturday, March 15, 2008
The second poor retail sales report in the last three months, providing one more bit of evidence that the long-awaited consumer retrenchment may be at hand, highlighted the week's economic reports.
Stocks and bonds ended with the S&P 500 Index down 0.4 percent to 1,288, now down 12.3 percent for the year, and the yield of the 10-year U.S. Treasury note fell 12 basis points to 3.42 percent.
International Trade: Driven largely by higher oil prices, the trade gap between the U.S. and the rest of the world increased slightly in January to $58.2 billion from a revised $57.9 billion in December. Excluding oil imports, the trade deficit narrowed considerably, from $34.8 billion to $32.1 billion, as a weaker dollar continued to boost U.S. exports while imports declined.
An increase in exports is one of the very few bright spots (maybe the only bright spot) in what is otherwise a very sickly U.S. economy. Unfortunately, in recent months, gains in exports are being easily offset by rising oil prices amid demand that has been about flat over the last year. The cost of imported crude oil rose from $82.76 in December to $84.76 in January with records set to be broken when the February data is reported next month, all of this negating any big improvements to the trade deficit's bottom line.
Retail Sales: Overall retail sales declined 0.6 percent in February after rising 0.4 percent in January. This was the second decline in the last three months and, on a year-over-year basis, sales are up only 2.6 percent.
The 2.6 percent annual gain is well below the "official" rate of inflation which came in at 4.0 percent in February. This means that, since retail sales are not adjusted for inflation, we are now experiencing negative "real" growth in this important area.
Motor vehicle sales fell 1.9 percent and are now down 4.2 percent on a year-over-year basis and, part of the continuing fall-out from the housing bust, sales of furniture and home furnishings dropped 0.4 percent in February and are now down 4.3 percent from a year ago.
Similarly, sellers of building material and garden equipment are finding fewer and fewer customers, these sales declining 0.7 percent last month and down 4.2 percent from last year at this time.
By far, the strongest category in the retail sales report over the last six months has been "gasoline station sales". Excluding these sales from the year-over-year total results in overall retail sales gaining just 0.86 percent rather than the 2.6 percent figure noted above.
For multi-year charts of furniture and home furnishings sales, building material and garden equipment sales, and gasoline station sales, see Retail sales disappoint ... again from last Thursday.
CPI Consumer Prices: Consumer prices were unchanged from January to February, both headline inflation and core inflation (excluding food and energy) posting a 0.0 percent change after five consecutive months of big increases.
On a year-over-year basis, overall consumer prices have risen 4.0 percent and the core rate stands at 2.3 percent.
Transportation costs declined 0.7 percent in February led by a 2.0 percent drop in motor fuel. Since the cut-off date for the CPI report is about mid-way through the month, look for a big jump in this category in the March report reflecting the surge in gasoline prices since that time.
Apparel prices declined 0.3 percent last month and food prices rose 0.4 percent in what was one of the dullest inflation reports in some time.
With additional pass-through likely to come from higher agricultural commodity prices and with the recent surge in energy costs, this was probably just a pause in the price pressures that should continue for months.
Many observers noted that this mild monthly inflation report should "pave the way" for a bold interest rate cut by the Federal Reserve in the week ahead - this sort of commentary is at best inane and, at worst, almost criminally negligent during an era when it is still believed that more easy money can solve the problems caused by too much easy money while entire classes of society are squeezed by prices that seem to rise everywhere but in the government's statistics.
Consumer Sentiment: Record gasoline prices, falling home prices, two consecutive months of job losses, shaky financial markets, and near-constant recession talk in the mainstream media all contributed to the Reuters/University of Michigan preliminary index of consumer sentiment falling to a new 16-year low, from 70.8 in February to 70.5 in March.
There are now clear signs that the consumer is not only pulling back on spending (excluding gasoline) but that they are expecting higher prices - the one-year inflation expectation of 3.6 percent in February rose to 4.5 percent in March.
Summary: Last week's retail sales report was but one more bit of evidence that the American consumer is beginning to pull back in what may eventually be a very big way with dire consequences for the U.S. economy. Inflation-adjusted retail sales are already in negative territory and likely to get worse as the cumulative effects of falling home prices, falling stock prices, and the onset of a recession take their toll.
This really shouldn't be coming as a surprise to anyone - but apparently it is.
The Week Ahead: The coming week will be highlighted by new data for housing starts and the FOMC meeting , both on Tuesday. Also scheduled for release are reports on industrial production and New York area manufacturing along with the homebuilders' housing market index on Monday, producer prices on Tuesday, leading economic indicators and the Philly Fed index on Thursday. Note that financial markets are closed on Good Friday.