(AZO) U.S. Retail Sales Rise Slightly in June

Retail and Food Service Sales were in line with expectations for June, coming in with an increase of 0.1%. Retail sales alone were up 0.2%. Total retail sales are up 8.5% from a year ago (8.1% including food service).

The Retail Sales report covers far more than just the Malls and is a very broad based measure of consumer spending. Since consumer spending makes up 70% of the economy, it is a very important number. That overstates things a bit since retail sales are mostly about the sale of goods, not services; and services make up two thirds of what consumers spend. Still, it is a pretty important thing to watch.

Auto (and parts) sales were up 0.8%, partially reversing a 1.8% drop in May. On a year over year basis they were up a solid 8.9%. That figure includes sales at parts dealers like Autozone (AZO) as well as the dealers like CarMax (KMX).

Excluding autos, retail sales were unchanged, in line with expectations, down from the May rise of 0.2%. Year over year sales are up 7.9%. The year over year numbers are pretty robust, but keep in mind that these numbers are not adjusted for price changes, so part of the year over year gains simply reflect inflation. However, outside of food and energy, inflation is very tame on a year over year basis. On a month to month basis energy prices are falling, while other prices are still rising slightly.

The growth was uneven, and that may be the more important story. Sales were weak in many of the more discretionary types of retail sales for the second month in a row. The report tracks 13 major categories of stores, of which eight were up and five down on the month. Year over year, all types of stores with the exception of Electronics and Appliances are showing increases, ranging from 0.5% (Furniture stores) to 23.6% for Gas Stations.

Clearly, gas prices were the major factor in the increased sales at the corner ExxonMobil (XOM) station, not a sudden rise in the number of 44oz. fountain drinks being consumed. Actually the evidence suggests that the volume of gasoline sold is actually declining slightly in response to higher prices.

Aside from the Gas Stations, which are clearly a special case, the next strongest group on a year over year basis was the non-store retailers, the group that includes the catalog and Internet retailers like Amazon (AMZN). They are up 14.7% year over year. As noted above, the Auto Dealers and Parts stores were up 8.9% year over year.

Not surprisingly, the worst performers on the month were the gas stations, where sales fell 1.3% after a 0.5% rise last month. Falling revenues at gas stations is a good sign, not a bad one. Money not spent at the pump can be spent elsewhere, and much of the cash spent on gasoline flows abroad to pay for oil imports, rather than recirculating in the economy.

The other part of non-core inflation, food, showed an increase, of 0.3%, after falling 0.1% in May. Sales at Grocery stores (and other stores selling food and beverages, excluding restaurants) jumped by 6.8% year over year. Sales of food for the home are among the least discretionary purchases, along with gasoline. Spending at Health Care stores, such as Walgreen’s (WAG) also tends to be relatively stable. That was the one stable area to see a decline, with sales down 0.2% on the month, but only after an increase of 1.2% in May. Sales are up 4.1% year over year.

It was the highly discretionary types of retail sales that took it on the chin in June. Sales at Electronics and Appliance stores are a good example. They fell 0.2% on the month, but that is on the heels of a 1.8% plunge in May. Year over year, sales are down 2.4%. However, on the electronics side of things, prices generally decline over time, so the situation is a bit of the flip side of what is going on at the gas stations (year over year). As for appliance sales, they tend to be spurred by housing sales, both new and existing, and both have been soft.

Furniture sales are also greatly influenced by home sales. People tend to redecorate when they move into a “new for them” house. Absent that, there are few purchases that are generally easier to put off until next month or next year than a new sofa or dining room table. Furniture sales were down 0.8% on the month, after falling 0.5% in May, and year over year are up just 0.5%.

Sporting Goods and Hobby stores saw sales fall, with a drop of 0.7% on top of a 0.4% decline last month, and up just 3.3% year over year. This category also includes book stores, so the bankruptcy and partial liquidation of Borders may be distorting the numbers in this group. Longer term though, the switch to electronic book sales, such as on the iPad or the Amazon (AMZN) Kindle pose a secular and existential treat to the book store category. Those electronic sales are mostly made by firms in the non-store retailing category. Those on-line retailers have been one of the bright spots in retailing, rising 0.3% for the month on top of a 0.4% rise in May and are up 12.3% from a year ago.

Clothing stores like Gap (GPS) showed some improvement, with sales up 0.7% after being unchanged in May. Relative to a year ago they are up 6.5%, which is a bit below average. A new pair of jeans is a bit less discretionary than a new kitchen table, but less discretionary than going to the grocery store.

General Merchandise stores, a category that includes the Department stores, saw a 0.4% increase on the month, after falling 0.1% in May. Year over year General Merchandise sales are up 4.0%, so sales are generally on the soft side at the mall anchors as well as the stores in the periphery of the Mall.

Going out to eat and drink is also a very discretionary item, and sales at bars and restaurants were down 0.4%, after rising 0.8% in May. Year over year sales are up 4.7%.

Overall, I have to call this a mixed report. The overall number was low, but in line with expectations. My concern is more in the mix, with a very sharp slowdown in the sorts of sales that signal confidence on the part of the consumer.

Keep in mind that these numbers are not adjusted for inflation, but inflation is low and likely to remain low. The bond market is crystal clear on its view that inflation will remain low. Bond market investors, who tend to be pretty sophisticated types, are willing to lock up their money for ten years at a yield of less than 3.0%. They would have to be blithering idiots to do that if they expected inflation to seriously start to accelerate. If inflation were to average more than 3.0% for the next decade those bonds would be certificates of confiscation, not investments.

The graph below (from Calculated Risk) shows the longer term path of retail sales, both total (blue line) and excluding sales at Gas Stations (red line). In both cases we are at new highs, but recall that these numbers are not adjusted for inflation.

While inflation, particularly core inflation, is still very low, over the course of a few years it still plays a significant role. The pace of growth since the bottom (slope of the lines) appears to be slightly better than what prevailed prior to the Great Recession, but it was not a very fast snap back, more like a reset to a lower level, then a continuation of the previous growth rate from a lower level. The ex-gasoline numbers are probably a better reflection of the overall state of the economy than the total numbers, but both are telling a pretty similar story. Things are getting better, but slowly, and seem to have stalled a bit over the last three months or so.

The second graph, (also from Calculated Risk) shows the year over year change in sales excluding gasoline going back to 1993. While the year over year gain of 6.4% is down from the 8.2% pace at the start of the year, it is still very healthy, and is higher than the increases that we were running for most of the previous economic expansion, and about on par with how we were doing for most of the Clinton economic expansion.

Core inflation was much lower than now in both of those previous expansions (these numbers strip out only the energy side, not the food side of the ex-food and energy inflation, so it is not a perfect match). That suggests that real retail sales outside of gasoline are healthy, at least on a year over year basis. Then again we are coming off the biggest downturn in spending in decades. That means there is a lot of pent up demand out there.


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