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U.S. retail spending pulled back in May, but only slightly

06/14/2011 by Alex Carrick, RCD Canadian Chief Economist

U.S. retail and food services spending in May was 0.2% lower than in April, according to the Census Bureau. Given the number of negatives in the economy – the continuing weak jobs market and the threat of more home foreclosures – this was a pretty good performance.

Year-over-year retail sales were +7.7% in nominal dollar terms and +7.5% on a three-month moving average “smoothed” basis.

Even taking into account a 3.2% inflation rate, the 7%-plus year-over-year gain in retail sales was quite impressive. It means “real” (i.e., inflation-adjusted) growth in consumer spending of more than 4.0%. Within gross domestic product (GDP), this shows up in the line item personal consumption expenditures (PCE).

In turn, PCE – also known as household spending – makes up 70% of U.S. GDP.

The increased cost of gasoline has probably diminished many analysts’ expectations about retail spending. High-priced gasoline has undoubtedly reduced expenditures in other discretionary areas (e.g., on entertainment, meals and expensive clothes), but gas purchases themselves are part of retail sales.

In fact, gas stations increased their dollar revenue take in May by 22.3% year over year.

High-priced gas may be having a negative impact on motor vehicle sales, which were -2.9% month to month and +5.4% year over year in the latest month.

Parts shortages as a result of the tsunami damage northeast of Tokyo also served to reduce sales in the motor vehicles and parts category.

It’s encouraging that year-over-year sales in three groupings related to the housing sector have stabilized around 0.0% or a little higher over the last several months, after trending downwards in the second half of 2010.

On a three-month moving average basis, furniture and home furnishing sales were +0.8% year over year in May. Electronics and appliance store sales were +1.7% and building material and garden equipment dealer sales were +2.9%.

One of the categories of retail sales that really stood out in May was non-store retailers, +15.9% year over year. It’s important to monitor this category but it shows the change that is underway in the whole retail sector.

This is the shift from bricks and mortar retailing to the Internet.

It’s remarkable to think about some of the eruptions that have taken place in the retail sector over only a limited period of time. There have been whole sub-market niches that have come and gone within the past 25 to 30 years.

For example, the invention of VCRs and other play-back devices led to a proliferation of giant video stores seemingly on every block in large urban areas and often even in small rural communities as well.

A sign of how quickly this market could change, however, was hinted at in the move to upgraded technologies such as CDs, Blue-ray discs and so on.

The evolution of the product (i.e., movies and videos) delivery system has now largely eliminated the need for stores at all. “On demand” services, downloading and the likes of Netflix have rendered retail outlets obsolete.

Big box book retailers are in danger of suffering the same fate. It’s now possible for anyone in the world with a laptop and access to the Internet to search for a book by author, place an order and have it appear on a digital reader within a couple of minutes.

For all the worry that U.S. consumers would begin retrenching to a degree that would harm the economy, that hasn’t happened so far. Total U.S. retail spending has recovered to a level higher than before the start of the recession in early 2008.

Furthermore, the slope of the curve for actual retail spending has been every bit as steep since early 2009 as it was before the onset of the hard times that lasted from November, 2007 through December, 2008.

What are needed now are more signs of improvement in the jobs market and a collective decision to be more confident about the outlook. Such a course alteration would then likely become self-fulfilling.

U.S. retail sales – three months smoothed
U.S. retail sales – three months smoothed
*"Year over year" is each month versus the same month of the previous year.
Based on latest three-month averages of current dollar adjusted data (and placed in latest month).
Adjustments are for seasonal variation, holiday and trading day differences, but not for price changes.
Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.
U.S. retail sales – three months smoothed
U.S. retail sales – three months smoothed
Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.

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