Retail Sales Have Some Positive Surprises

I’m a little late with things today, so let’s get what you probably already know out of the way.

The stock market extended its rally to three days. The Dow was up 239 and the S&P up 29. As you know, I don’t give a lot of credence to moves over a couple of days but this move is strong. I have no idea if it is a bear market rally or truly a discounting of discounting an imminent turn in the economy. I’m still out on the limb predicting a turn in the second half and one that’s bigger than expected, so I hope the market is seeing something to validate that.

Despite my hopes, I suspect that a lot of the move is technical as well as buoyed a bit by the PR push from the banks and the administration. A lot of happy talk about bank profits and suspending mark-to-maket accounting can do wonders in the short term. There was, though, a solid piece of good news today — retail sales.

Reuters reports that retail sales dipped 0.1% in February after rising by a revised 1.8% in January. Stripping out autos and gasoline, retail sales were up 0.5% and up 1.4% in January. Retail sales fell 4.3% in the fourth quarter.

The pleasant surprise is that the rate of decline appears to be leveling off. Given the fact that February is traditionally the weakest sales month of the year and the escalating unemployment situation, these are much better results than might have been expected.

Here is a sampling of economists reactions from the WSJ Real Time Economics blog (follow the link for more).

  • Consumers have shown resilience in the past, and perhaps one should never under-estimate Americans’ propensity to shop, even when economic fundamentals and economic theory suggests more restraint is in order. Anecdotal reports of deep discounting almost certainly contain some truth. One should keep in mind that the retail sales data are reported on a nominal basis, so for retail sales to rise on lower prices would require that consumers’ real volume purchases increase more than a percentage point for each percentage point drop in prices. This is not totally unreasonable but it is a stronger statement than just that there was a lot of discounting last month. In spite of the terrible labor market, incomes are getting some support early in the year from government-related sources. Cost of living adjustments for social security recipients increased a robust 5.8% in January. Income tax payments are tracking lower early in the tax season, partly because of lower realized capital gains tax payments. Finally, unemployment insurance payments have been increased. As with the payroll survey, the retail sales survey uses the equivalent of a birth/death model for firms entering or exiting business. Recent reports of retail bankruptcies may not make their way into the data until the more comprehensive annual retail sales report. A simpler story is that retail sales were extremely depressed over the last few months and some payback is in order. –Michael Feroli, J.P. Morgan Chase 
  • Retail sales were substantially better – both for February and from a sizable upward revision to January… Looking through the categories, the increase appears broadly based as no single category is driving the increase; instead most are up for the past two months. Some of the increase could be due to clearance of unsold merchandise and the impact of a phasing out of discounts around Christmas on the nominal value of sales, but that is unlikely to explain all the strength. –Goldman Sachs
  • Consumer spending continued to recover… Although today’s result was a welcome improvement, we expect consumer spending to remain downbeat in the near-term due poor labor market conditions, tight credit and subdued consumer confidence. Consumer spending may not continue contracting at the fourth quarter’s rapid pace, but a consumerled rebound in growth appears unlikely as well. –Nomura Global Economics
  • Two months does not a recovery make. It does, however, provide a little hope and that might be what’s fueling the equity markets.

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