Some Good Economic News (That’s Not Really That Good)

Mid-month the US Census Bureau reported its monthly retail sales number… And it blew away expectations coming in up 1.3%.

Source: Tradingeconomics.com

This big boost in sales should be great news because the Census Bureau is more than happy to remind you that consumer spending represents roughly two-thirds of our GDP.

Then again, when it comes to government reporting, things aren’t always what they appear. It helps to read the small print in report warning labels (my emphasis)…

Advance estimates of U.S. retail and food services sales for October 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $694.5 billion, up 1.3 percent (±0.5 percent) from the previous month…

That’s right. They don’t adjust for inflation. And you can see in the charts below, inflation has been a pretty big factor over the past couple years…

Retail Sales (Annual)

Source: Tradingeconomics.com

Inflation (Annual)

Source: Tradingeconomics.com

Consider March, April, and May 2021 when retail sales exploded. Inflation was just beginning to take off and a lot of free stimulus money was hitting the economy. You can see how, as inflation kept rising, retail sales kept falling off. Even at 8.27% (which is abnormally high) it had been fueled by a 7.7% boost in prices.

The Grocery Industry is Actually Struggling

In your last letter I wrote about how businesses and consumers were going to be the forces that fix inflation, not the Fed. I used Walmart as an example. A lot of retailers, especially those in the food business, have been struggling to follow suit. 

Inflation has pulled back less than 1.5% from its high (even less than the Fed’s 2% target). But their troubles aren’t over. Even Walmart…

Walmart earns about half their revenue from grocery sales (which pretty much makes them the biggest grocer in the country.)  For months they’ve been tracking the shift in consumers’ behaviors. From this past May:

Walmart Chief Financial Officer Brett Biggs told CNBC that the big-box retailer has seen some budget-strapped customers trade down to the store brand for deli meats and buy a half gallon of milk rather than a full one.  

How’s the competition doing?

Publix is an employee-owned (you can’t buy their stock on an exchange), higher-end grocery chain with 1,312 stores throughout Florida and the southeast. They recently reported their earnings…

Publix stock price decreased Tuesday to $13.19 after snowballing economic conditions resulted in a 54% decrease in net earnings despite higher sales for the third quarter.

Two of the biggest grocery players in the country, Krogers and Albertsons, announced this past October they would be merging with Kroger offering to buy Albertsons for $24.6 billion. The deal has yet to be approved by regulators (and is facing some stiff opposition from unions and smaller chains alike) but by and large, this kind of merger suggests an all out effort by these companies to keep pace with Walmart in terms of purchasing/negotiating power (i.e. control their margins). 

In 2017, Amazon bought high-end grocery darling Whole Foods Market for $13.7 billion. They’re now starting to close stores. (We really shouldn’t read too much into this piece of data, but it’s certainly worth noting given the bigger picture…)

Professor Joseph Fitter of the Indiana University Kelley School of Business pretty much sums up the retail sales problem that businesses are dealing with:

“…last month I sold $500,000 at my store, this month I sold $600,000. But if inflation says the prices were higher and therefore, I should have sold $700,000, it means the consumers are probably trading down,” he said.

As long as inflation remains a significant factor… retail sales will be masking the real pain the economy is feeling.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily