Yesterday's retail sales numbers were great...if you ignore the government's understated inflation stats
I've bashed the government on a number of occasions for publishing misleading statistics on the economy, such as understating the inflation that people in the real world experience in the CPI. Even if you take the government's understated CPI numbers at face value, inflation is outpacing the retail sales figures that the media celebrated yesterday (see article: Retail sales strength rebuts recession talk). The government's published retail sales number for April came in inline with analysts' estimates at -0.2%. Furthermore, the media pumped up the number even further by looking at it ex autos, which came in at +0.5%.
One of my favorite analysts, Bespoke Investment Group, broke down the numbers and they don't look quite as rosy as everyone is making them out to be (see article: Retail sales for April). First, take a look at the areas that showed strength:
Over the past year, the three categories of retailers that have had the largest gains in retail sales are gas stations, food and beverage stores, and general merchandise stores. So basically, the only things that people are spending more money than they used to on are gasoline and food. Sure, general merchandise stores posted nice gains, but I bet you what's left of the U.S. dollar that a lot of that strength came from discount retailers like WalMart, CostCo, etc...as pinched consumers try to purchase the stuff that they need as cheaply as possible. After the rebate checks filter through the system, consumer discretionary companies are headed for a world of pain.
Not only are larger chunks of people's incomes being consumed by the basic necessities of life, but adjusted for inflation the 2% year over year rise in retail sales that the government reported was actually a 1.9% drop when adjusted for inflation. And that is using the understated inflation numbers that the government publishes, not what's happening in the real world. This is the fifth consecutive month that retail sales have declined after being adjusted for inflation. That is the longest streak of consecutive monthly drops in the past fifteen years!
What does this mean to me? It means that most people's assumptions that the Fed will begin to raise interest rates later this year or early in 2009 to combat inflation are way off. We better hope that the Fed doesn't start raising rates in this sort of economic environment. If they do, they'll end up crushing what's left of the economy. A low Fed Funds Rate for an extended period of time will likely lead to continued weakness in the U.S. dollar, after the current bear market rally is over, especially after taking a look at the hawkish comments that came out of the Bank of England yesterday (see article: King Sees Faster Inflation, Limiting BOE Rate Cuts).
That's all for now. I'll report back when I've had a chance to take a look at this morning's laughable CPI number, which came in lower than expected.