More Cracks in the Economy

January 26, 2023

Last week the US Census Bureau reported that retail sales had fallen 1.1% (m/m) after falling 1% the month before. 

Could this be indicating yet another crack in the strength of the economy?

I believe so — but not for the reason you might think. And I think it’s even worse than it looks.

Let me show you what I’m talking about.

Booming Economic Numbers?

One of the important economic reports the market watches is retail sales. 

Strength in this number has always been considered good news for the economy. It says that businesses are selling goods and services. And consumers are buying. Growing demand is a sign of strength in a real economy. (Not so much in a fake economy like ours.) 

The problem with this report is that it doesn’t adjust for price increases (i.e. inflation). I pointed this out in a post last November.

In any case, retail sales have been booming since the initial pandemic lockdowns crippled our economy.

And all this buying and selling positively impacts GDP.

Unfortunately a big part of the rise (or economic strength, if you want to look at it that way) has been the price of the things being bought and sold. It doesn’t necessarily mean that more things are being bought due to greater economic prosperity. It simply means that, in part, people are spending more for what they buy. 

Here are two of the charts I shared in the previous post — updated through the end of the 2022:

Retail Sales (Annual)

Source: Tradingeconomics.com

Inflation (Annual)

Source: Tradingeconomics.com

Comparing the two charts you can see the impact inflation has had on this report. Here’s what I wrote in November…

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.

(Annual retail sales gains typically average in the 3-4% range.)

But Here’s the Trouble


Take a look at the chart below from the US Census Bureau (keeper of the retail sales numbers). It shows the dollar value of goods that have been purchased over the last 12 years…

Source: The US Census Bureau

.

Take note of two things.

First the slope of the rise since the pandemic low versus the slope since 2010. This vertical leap isn’t an explosion in “growth” as some political talking head-types might have you believe. It’s an explosion in inflation

The other thing is it would appear, for the moment at least, that the upside for retail sales has topped out. Is this number coming down with inflation?

I don’t think so. 

I believe inflation has finally begun to weaken consumer demand. 

Because while the rate of inflation has started coming down, actual prices, as you can see in the consumer price index chart below, are still at record highs. 

Consumer Price Index

Source: The Federal Reserve Bank of St. Louis

And here’s what’s even more unsettling. If we adjust the retail sales chart above for inflation (using 2010 as a base year) you can see that economic activity has been pretty much stagnant since March 2021!

Adjusted Retail Sales (2010 Base)

Source: The Federal Reserve Bank of St. Louis

Lies, Damned Lies, And…

I think it was Mark Twain who said, “There are lies, damned lies, and statistics.”

A lot of economic reports have recently been suggesting a strong economy — i.e. a “soft landing.” 

But the reality isn’t always what they purport to show.

We’ll keep watching…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily