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Today's Market WrapUp 02.20.2008 Mon Tue Wed Thu Fri Puplava Archive
The markets initially rallied off the retail sales report that came out last Wednesday as sales for January rose 0.3%, which was in stark contrast to the consensus expectations of a 0.3% decline. However, the underling details of the report painted a darker picture that did not justify the market's reaction. This reminds me of the market's reaction to the June chain store sales report that was released on July 12th of last year that saw a sizable rally that was completely unjustified as was shown when looking at the details of the report (Reality Unspun). Looking at the recent underlining data for both retail sales and chain store sales shows that the markets again displayed misplaced hopes as areas of discretionary spending are weakening as consumers retrench and shift their buying habits to discount stores seeking lower prices. This can be seen when looking at retail categories such as apparel sales, department store sales, and furniture store sales, all declining at a negative year-over-year (YOY) rate and at or near recessionary levels. Of particular interest are department store sales, which have absolutely fallen off a cliff (Figure 2)! However, wholesale club stores are rising as they did heading into the 2001 recession. Figure 1
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The shift in consumer spending from higher end stores towards the wholesale club stores like Wal-Mart and Costco was a trend that was seen during the last recession as consumers tried to get more bang for their buck. We are starting to see this same trend again as real GDP has decelerated while wholesale club chain store sales are rising, diverging from the real GDP trend. Figure 5
As mentioned above, consumers are cutting back on discretionary items while devoting more of their incomes towards essential, nondurable items like food and energy. This can be seen when looking at the ratio of durable goods industrial production (homes, autos, appliances) versus nondurable goods industrial production. The ratio typically turns down heading into recessions while its advance indicates healthy consumer spending. The ratio has been trending down for years now, with declining vehicle sales playing a large role in this decline. Figure 6
The ratio is likely to continue to plummet further as consumers continue to hold off plans for automobile and home purchases according to the Conference Board survey. Another key consumer sentiment indicator comes from the ABC News/Washington Post consumer index, which showed consumer’s opinion of their personal finances and their attitudes for future spending falling by the wayside in rapid fashion. Mortgage equity withdrawal (MEW), a major driving force for retail sales earlier in the decade, continues to decline with retail sales along with it as consumers are finding it harder to tap into their former housing ATMs, developments that do not bode well for nondurable goods orders or retail sales overall. Figure 7
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While consumers are cutting back spending on durable goods items, spending on nondurables remains robust. Food and beverage store sales continue to remain strong as do gasoline station sales, the two strongest areas of growth in the last week’s retail sales report. How is a retail sales report that shows declining sales growth in discretionary sectors and with its two strongest areas of growth in essentials like food and energy bullish? Yet this is what the markets rallied off of last Wednesday! What is even more sobering is that a large part of the growth in food and energy sales is due to inflation as seen by the recent CPI report. However, using the food and beverage CPI index to calculate real growth in retail food and beverage store sales and using gasoline prices to correct for inflation in gasoline station sales reveals that consumers are paying more for inflation than actually consuming a higher level of goods. Real food and beverage sales are decelerating and real gasoline station sales are actually displaying negative growth. Figure 10
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The above data shows the poor state of the US consumer who’s spending more and more to cover the costs of nondiscretionary items like food and energy at the expense of discretionary retail sectors like apparel and department stores. More and more of what consumers are spending are going towards covering the costs of inflation and does not represent true growth as shown with food and energy. This can also be seen in total retail sales when looking at the inflation adjusted (CPI-adjusted) retail sales growth rate. Inflation adjusted retail sales growth rate continues to fall into negative territory after turning negative in December of last year, with December’s YOY growth rate coming in at -0.44%. January’s growth rate declined to -0.53% and is not likely to turn around as consumers dig in for rough times ahead. The negative growth rate seen in December will likely mark the date that the US entered into a recession as negative real growth rates in retail sales have been a hallmark of every recession seen since 1970. Obviously not an encouraging development and certainly not a cause for a market rebound! Figure 15
Today’s Market The markets erased early morning losses that were caused by a higher than expected inflation report when the FOMC minutes revealed that the Federal Reserve was not overly concerned about inflation. Investors even dismissed record oil prices that saw light sweet crude oil on the New York Mercantile Exchange settle at $100.74 a barrel. The Dow Jones Industrial Average rose 90.04 points to close at 12427.26 (+0.73%), the S&P 500 advanced 11.25 points to close at 1360.03 (+0.83%), and the NASDAQ gained 20.90 points to close at 2327.10 (+0.91%). Treasuries fell with the yield on the 10-year note rising 4.2 basis points to close at 3.917%. The dollar index was up, rising 0.14 points to close at 76.14. Advancing issues represented 60% and 55% for the NYSE and NASDAQ respectively, reflecting a mostly positive market move. Chris Puplava Copyright © 2008 All rights reserved.
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