If you’re looking for fresh news that the risk of deflation/economic deterioration is gaining momentum, you won’t find it in today’s retail sales report for August. The advance estimates indicate a seasonally adjusted rise of 0.4% last month vs. July, the Census Bureau reported today. That’s the second monthly rise for U.S. retails sales and the highest percentage gain since March.
If we look at the monthly trend of late, there’s an upside bias. It’s hardly definitive or strong enough to close the book on worries, but considering what might have been it’s okay and more than welcome.
Looking at dollars spent shows a similar reason for mild optimism. In fact, one can argue that the seasonally adjusted trend over the past two years remains intact: retail sales are rising, as the next chart reminds.
So, what’s the catch? One area to watch is the rolling 12-month percentage change in retail sales. The trend here, which is a proxy for the big picture change, may run into trouble in the months ahead. As the third chart below shows, the year-over-year change has weakened recently. It’s one thing to elevate spending off of generational lows; it’s another to keep the pace afloat in an age of hefty debt and balance sheet restructuring.
Even putting aside all the economic headwinds that lie ahead, the slowing in the annual rate of change for retail sales isn’t surprising. The rebound was always destined to level off. The reflation reached a peak in retail sales back in April, with an 8%-plus change vs. a year earlier–an unsustainable pace, of course, which is to say that some downshifting was and remains inevitable.
In fact, it wouldn’t be shocking, or necessarily ominous, to see the annual pace of retail sales fall further in the months ahead. As of last month, sales were up 3.6% vs. a year ago. That’s vulnerable to lesser levels in the months ahead, based on the assumption that the economic rate of growth may suffer additional slippage. That was certainly the case in the latest GDP report, which revealed a significant slowdown in economic growth in the second quarter vs. the first: 1.6% real vs. 3.7% in Q1 (in nominal terms that works out to an annualized 3.6% rate in Q2, down from 4.8% in Q1).
But how much downshifting is too much? Good question, and no one can be sure in real time if we’re returning to the new normal or falling into a new hole. It’s going to be close, which is why everyone’s watching the numbers so closely–more so than usual.
But for the moment, retail sales are holding up. That supports our long-running thesis that the economy this year and next would somehow muddle through, although there would be plenty of bumps along the way. The recovery theme has earned another day of reprieve today. And given the apparent change in monetary policy, as we noted earlier today, the appetite for risk may go up another notch or two.
One day at a time…