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What the Retail Sales Data Means

12:00 AM, Aug 18, 2012 • By IRWIN M. STELZER
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“America goes shopping again,” exulted one commentator. “The American consumer is back, big time,” chortled another. “Retail sales increase notably more than expected in July reflecting across-the-board strength in sales,” commented the more sober economists at Goldman Sachs, reporting a 0.8 percent increase, the first rise in four months. The figures surprised, exceeding the consensus forecast of 0.3 percent. Throw in the nascent recovery in the housing sector and policy wonks, for whom the real economy exists merely to provide grist for the policymaking mill, and talk quickly turned to just how Federal Reserve Board chairman Ben Bernanke and his monetary policy committee would react. The consensus is that those who are hoping that Bernanke will use the platform provided by the gathering of central bankers in Jackson Hole, Wyoming, later this month to launch QE3 are likely to be disappointed. The retail sales and other data, says Chris Williamson, chief economist at Markit, “argue against the need for additional stimulus from the Fed.”

It is well to remember that it is risky to project from one data point, in this case July retail sales. For one thing, retail sales figures are notably volatile: these sales dropped by 0.7 percent in June before rebounding in July. For another, sales in the recently ended second quarter dropped by 0.6 percent compared with the first quarter, the largest rate of quarterly decline since May 2009. And as if to reaffirm economic right’s title of the dismal science, economists at Société Général chime in with the thought that rising costs will likely depress real spending by consumers in coming months, “hinting at another round of downward adjustments to economists’ Q3 GDP growth forecasts.” So, to borrow from George Gershwin’s description of woman, the July retail sales figures may prove to be “a sometime thing.” If Bernanke believes that, and if the next jobs report proves to be unpleasant, he just might find some way to ease monetary policy further, to the applause of stock traders and the moans of those who worry about inflation and the recent uptick in yields on U.S. treasury IOUs.

Perhaps the best way to see what the sales figures tell us about the state of the U.S. economy is to dig into the reports of several leading retailers, a process that inevitably starts with Walmart, the world’s largest retailer by revenue. Its revenues were up 4.5 percent over July 2011, due largely to growth overseas, which account for more than a quarter of the company’s revenue. But CEO Mike Duke warns that Walmart’s primarily low-income customers remain bound by the “paycheck cycle,” doing most of their buying on the day they receive their paychecks, and are being hit by higher gasoline prices. Prices at the pump took analysts by surprise by jumping almost 10 percent in July, making it likely that 2012 will record a record high in petrol prices, which is worrying the Obama administration enough to have it trying to talk down prices by hinting that it might release crude oil for the Strategic Petroleum Reserve.

The nation’s second-largest retailer, Target, also reports that its lower income and somewhat better off customers continue to struggle. Revenues were up in July, mostly due to sales of non-discretionary items such as food and health care products, but it took “Christmas in July” discounting and 5 percent paybacks on the company’s credit card sales to boost volumes. Ominously, bad debt expenses in the credit card division soared.

To add to the picture at the lower end of the income scale we can look to Sears and J.C. Penney. Sears is a special case, with chairman Eddie Lampert trying to reverse a slide that Columbia University professor Eric Abrahamson says has it staying alive by selling parts of itself (it has sold stores and other assets), but “permanently failing” as a retailer. Penney is wallowing in red ink ($132 million in the first quarter), as customers accustomed to discounts shun its new every-day low price, “fair and square” policy, and seem to be migrating to Macy’s, which reports that stores in malls also occupied by Penney are growing rapidly. Penney lured Ron Johnson, its new CEO, from Apple, where he ran that company’s spectacularly successful retail operations. His efforts to introduce some of Apple’s techniques into Penney’s operations have not paid off (he would add, “yet”): sales fell almost 22 percent in July compared with last year, and sales per square foot came to a meager $135, compared with $6,123 for Apple, according to analysts at RetailSails.

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