Retail Sales at +2.5% Year over Year are Tame
Based on the latest numbers from the U.S. Census Bureau, May 2008 was a so-so month for U.S. retail sales. Year-over-year total retail sales, in current dollars, were +2.5% on an “actual” basis and +2.6% on a three-month “smoothed” basis. These numbers are pretty tame, given that the latest inflation rate was +3.9%. The latest month-to-month figures were a little more encouraging, at +1.0% for “actuals” and +0.6% for “smoothed”.

Benchmark Numbers
Ideally, one is looking for retail sales growth of about +5.0% year over year, with an accompanying inflation rate of about +2.0%. Those levels generally correspond with real (i.e., inflation-adjusted) personal consumption expenditures of about +3.0% in the National Accounts, laying down a good foundation for overall growth in the economy.

Gasoline Sales are Pumping up the Total
The current retail sales numbers are being affected to a significant degree by factors related to energy markets. For starters, total retail sales are being pumped up − the “raises” portion of the headline − by ongoing increases in gasoline prices as a result of record-high international oil prices. The retail sub-category “sales by gasoline stations” is +13.8% on a year-over-year actual basis and +17.1% on a year-over-year smoothed basis. Taking gasoline sales out of total retail sales lowers the overall figure from +2.5% to +1.2%.

But There’s More to the Story – Auto Sales Altered and Depressed
But the story doesn’t end there. High gasoline prices have seriously altered and depressed demand in the automotive sector. Not only have many new vehicle sales been put on hold, but there has also been a shift away from higher-priced SUVs and trucks to lower-priced compacts and mid-sized passenger cars, on the part of consumers.  

In May, year-over-year motor vehicle and parts sales were -7.0% on an actual basis and -5.8% on a smoothed basis. The first chart below shows that motor vehicle and parts sales have been on a downward path for seven straight months. There have been other periods of decline in this retail category since 2001, but none has been as prolonged. And only one other period of decline, in late 2002, was as steep.  

Retail Sales Consistent with Final Domestic Demand
Removing motor vehicles and parts from total retail sales (also net of gasoline) bumps the number back up again, to +3.7%. It is interesting to note that this level of retail sales is almost exactly the same as the overall inflation rate. This suggests that the real rate of change of non-auto and non-gasoline retail sector is essentially 0.0%.

Furthermore, this is completely consistent with the fact that final domestic demand (i.e. Gross Domestic Product exclusive of inventory adjustments and foreign trade) was 0.0% in both the fourth quarter of 2007 and the first quarter of 2008.

Construction-related Retail Sales Turn Upward

As a final observation, the second chart that accompanies this story offers more confirmation that U.S. housing markets are starting to firm up. Both of the housing-related retail categories, “furniture and home furnishings” (-5.3%) and “building materials and supplies (-3.9%), were less negative in the latest month than in either of the two preceding months.

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