The rebound in retail sales is at the top of the list for thinking that the economy will weather any challenges to growth in the months ahead. Consumer spending, after all, accounts for roughly 70% of GDP, as we’ve so often been told. That implies that a robust rate of growth in retail sales is just what the doctor ordered to chase away the business cycle blues. The good news is that the headline number for retail sales certainly looks encouraging these days. But if we strip out sales of gasoline stations, the case for optimism suffers a bit.
The first chart confirms that retail sales have rebounded sharply since the Great Recession. In fact, total nominal sales have recently hit new highs on a seasonally adjusted basis (black line). Joe Sixpack is spending more than ever. But if we strip out retail gasoline station sales (red line), the trend isn’t quite so strong. Every dollar spent on gasoline is presumably a dollar less spent elsewhere on goods and services that are more likely to contribute to economic growth.
The question is whether there’s anything surprising in retail sales after adjusting for gasoline consumption? Not necessarily. As the economy grows, so too does spending on gasoline. A decline in gas consumption usually means that the economy’s in trouble. It’s no wonder that gasoline sales tumbled in the Great Recession and then rebounded once the recovery arrived. But with gas prices surging recently, one might wonder how deeply energy costs are pinching consumers.
The next chart provides a clue by way of monitoring gasoline sales as a percentage of total retail sales. As you can see, this measure is nearing the old high reached back in August 2008, when gasoline sales comprised more than 12% of retail sales. As of last month, the comparable figure was 11.8%.
The share of retail sales that go to gasoline is, of course, largely a function of price, although fluctuations in demand proper also play a role. Only if gasoline prices continue to rise should we expect that a bigger slice of retail sales will be diverted to paying more at the pump. Given the volatile history of commodities, however, one might expect that soaring gasoline prices over the last year will abate soon and perhaps even reverse course.
The key issue is one of the impact on the broad trend in retail sales. For the moment, gasoline is taking a toll that’s more than negligible. As the third chart shows, the rolling 12-month percentage change in retail sales ex-gasoline (gold line) is considerably lower vs. the headline counterpart (green line). If the retail ex-gasoline trend continues to suffer in a material way vs. total sales, that’s may be a warning sign of some significance.
Indeed, in 2008, the trend in retail ex-gasoline deteriorated rapidly, providing a clue that the high energy costs were biting deeply into consumer spending habits. Headline retail sales held up much better, at least for a time, although this was a misleading bit of optimism. As we now know, the recession had already begun in December 2007, although there was some debate in real time about the economy’s healthy, even as late as the summer of 2008. The trend in retail sales ex-gasoline, however, was sending a clear message of reality earlier than retail sales overall.
For the moment, the trend in retail ex-gas still looks healthy. But all bets are off if this measure deteriorates further in absolute and relative terms. The price of gasoline is to some extent destiny here. If prices fall sharply, or at least remain steady, the worst may be over. But Joe Sixpack’s state of mind is crucial too, and it’s unclear how much of a drop in gas prices is required to perk up his spirits (and his spending).