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Add U.S. October retail sales to the list of positives on the North American economy

11/15/2011 by Alex Carrick, RCD Canadian Chief Economist

The U.S. economy over the past couple of years has been weighed down by a great number of question marks. Some of those are starting to be lifted, however, and the extent to which retail sales might recover has been one of them. 

They now stand well ahead (+3.5% versus November 2007) of their previous peak from before the recession. Furthermore, the slope of their growth in the last three years has been every bit as steep as it was before sales crashed in 2008.   

According to the latest report from the Census Bureau, U.S. total retail sales climbed 0.5% month to month in October, which translated to a 7.2% gain year over year.

An annual figure of +7.0% or higher is quite good. Even after factoring out an inflation rate that is approaching +4.0%, it establishes a solid base for overall economic activity. That’s because personal consumption expenditures make up 70% of U.S. gross domestic product.

(In Canada, the proportion is lower (55%) because the foreign trade sector accounts for a larger share of total activity than it does in the U.S.)  

The U.S. maintained strong overall retail sales in the latest month without as much help from the auto sector. Motor vehicle sales were +4.2% month over month in September, but they slowed to only +0.4% in October.

They now stand 7.0% higher than a year ago, which basically mirrors the increase in all-category retail sales.

(In the U.S., the auto industry makes up 17% of total retail sales. In Canada, the percentage share is 22%).

In the latest month, it was electronic and appliance sales that jumped significantly higher. They actually increased more on a month-to-month basis (+3.7%) than on a year-over-year basis (+3.5%).

The speculation is that the Apple iPhone 4S led the sales charge.

The newest iPhone launch probably also played a role in sales by non-store retailers which rose 1.5% month over month. This category includes Internet merchants and mail-order services.

The U.S. economy may be sliding into the gap opened up by a faltering Europe and a less-certain China. The former is due to the debt crisis and the latter results from a more restrictive monetary policy.

A property price bubble, too many see-through buildings, inflation in excess of 6% and a government edict that banks cut down on lending has lowered expectations for China’s growth rate.

Conveniently, many of the indicators on the U.S. economy are beginning to perk up.

Individuals and families have spent the past couple of years paying down their loans. The fact interest rates are so low has been an incentive to refinance mortgages.

Until recently, this was made more difficult by assessed property values falling below outstanding principal amounts and by high conversion fees. However, some recent regulatory changes have addressed those problems.

The number of actual foreclosures has fallen and home prices have stabilized at rock-bottom or are tentatively creeping upward. One sub-sector, the multi-unit rental market, has been first to exit the basement.

Perhaps the most important indicator for the overall economy is employment. U.S. jobs growth has been on a gradual upward path for several months and initial jobless claims have moderated convincingly.

Retail sales are another positive indicator. They need to maintain their momentum heading into the all-important year-end holiday shopping season.

On that score, analysts are already warning shoppers about one likely scenario. It might be advisable to make purchases earlier rather than later.

Storekeepers have learned from experience to be cautious about overstocking. Lower inventories will likely mean fewer last-minute bargains than in previous years.  

In Canada, new motor vehicle sales data for September has just been released by Statistics Canada.

It shows unit passenger car sales declining 0.7% month to month while van truck and bus sales increased 3.2%.

Overall sales rose 1.5% month to month but were essentially flat (-0.4%) compared with the same month last year.

A super-discrepancy has now opened up between passenger car sales in Canada and the vehicles included in the “vans, trucks and buses” category. The difference has never been wider.

Monthly average total vehicle sales in Canada are +1.8% versus the first three quarters of last year. Passenger cars sales are -2.8% and vans, trucks and buses +5.5%.

Passenger car sales in Canada are as low as they’ve been in several decades. Van, truck and bus sales are the highest they’ve ever been.

Obviously, product mix plays a big role in how well individual carmakers are doing. It also helps determine how healthy the labour and housing markets are in the communities that host the assembly operations.

It must be remembered, however, that a great deal of Canadian auto production is destined for U.S. sales rooms. The number of vehicles produced in Canada is approximately double the domestic sales figure.

Therefore, a U.S. consumer who is more willing to spend is important for Canada as well.

It may be to the good fortune of all of us that the U.S. economy appears to be coming back to life at a time when it is most needed.

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.
Monthly motor vehicle sales in Canada (seasonally adjusted)
Monthly motor vehicle sales in Canada (seasonally adjusted)
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.


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