Retail Sales

The numbers for retail sales were released yesterday, in line with (rather anemic) expectations. Such activity directly accounts for approx. 35% of GDP, and much more when all other effects are factored in. Let's take a look at a few charts.

First, the year-over-year change in real retail sales, i.e. adjusted for official CPI inflation. The blue line is the monthly data and the red tracks the six month moving average.

Data: St. Louis Fed

The downtrend is quite apparent, even when using the low, official CPI figures produced by the government. Furthermore, with the price of gasoline and other fuels spiking sharply in the past few years, the impact of fuel sales to the overall numbers is becoming increasingly important. The next chart shows sales at gasoline stations as a percentage of total retail sales. Unquestionably, energy is becoming a more important part of the family budget.

On the other hand, food and beverage expenses at the supermarket have eased off very considerably over the years, as the next chart shows. Until very recently, real prices for food had been coming down for years and this allowed even less affluent consumers to spend more on other, non-essential items that carried higher profit margins (e.g. iPods, flat-screen TVs and Chinese imports). In addition, some food purchases were perhaps getting counted in other sectors of the retail "pie", i.e. as part of purchases at big discount stores that have added food sections (WalMart is an example). In any case, this trend appears to be bottoming out now; if recent food price increases stick, people will have less money to spend on the non-essentials.


The combination of gasoline and food purchases (i.e. adding the last two charts together) is shown in the next chart. After bottoming out during 2002-04, expenses for essentials is now on the rise once again.

How likely is this trend to continue on the upside? In my opinion, the chances are very high; food and fuel price pressures at the retail level are becoming apparent everywhere, China and Europe included. They are not caused by one-time events like droughts or pests, but by more fundamental supply/demand factors and questionable monetary policies in both the US and China.

The negative effects for corporate profitability in the services and non-essential goods sectors (i.e. just about the entire US economy) are going to be very significant and likely won't go away in one or two quarters.