The case for remaining cautious on the economic recovery grew a bit stronger today with the updates for wholesale prices and retail sales. Both registered declines, suggesting that strategic-minded investors should stay opportunistically cautious.
The economic data in recent months offered reason to think that the deflationary risk might be fading. That hope hasn’t faded entirely, but it’s a tad weaker today than it was yesterday, in light of news that retail sales slipped 1.1% last month and wholesale prices retreated by 1.2% in March.
The crux of the investment challenge since last fall has been deciding how to choose between the relatively attractive prices of risk vs. the implications drawn on the expected headwinds for the economy. In theory, the former will compensate for the latter. The danger is thinking that we know the magnitude and duration of the latter.
The case for seeing the glass half full is that the expected depth and extent of the economic contraction might be lessening. The evidence, albeit slim, is that the war on deflation is beginning to show progress. As we wrote last month, “deflation is on the run…for the moment, anyway,” a ray of optimism born of reading the consumer price report for February, which advised of a slight increase in prices. Slaying the deflationary beast was and is critical, as the prospects for stabilizing the economy, much less repairing it are dim until the D risk is thoroughly dispatched.
Unfortunately, the demon may not be quite dead yet. Like a bacterial infection that seems to withdraw only to return, just as the patient is feeling better, deflation still threatens…again, or so the March report suggests. Deciding if it has legs remains an open question once more.
The 1.1% drop in retail sales last month is too large to pass for a statistical glitch. All the more so after looking at the even-larger tumbles last month for sales of motor vehicles and parts (-2.3%), furniture and home furnishings (-1.7%) and electronics and appliance stores (-5.9%).
The Producer Price Index isn’t quite so distressing, even though it posted a 1.2% drop last month, the first monthly decline since December. Much of the loss is related to energy, which resumed its general price retreat last month after registering gains in January and February. Taking out food and energy prices, the core PPI was flat in March.
Tomorrow’s report on March consumer prices will offer more clues about deflation. In the meantime, it’s still too soon to declare victory. For what it’s worth, your editor’s guess is that we’re going to play a game of deflation’s dead/deflation’s alive for the balance of the year.