"Core" Retail Sales Down 0.1% Month-to-Month, 1.7% Year-to-Year

PPI Absorbed Oil Selling with Minimal Annual-Inflation Impact

Trade Revisions Show Delayed Import Reporting, Suggest Downward GDP Revisions

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Inflationary Recession Instensifies. Despite recent heavy oil selling, the monthly pattern of oil-price decline is not unlike the one seen last year, with the effect that year-to-year annual PPI inflation was little changed in August. Similarly, year-to-year CPI inflation, due for reporting next week (Tuesday, September 16), could hold at or even notch a little higher from July’s 17-year high.

On the economic front, real (inflation-adjusted) August retail sales appear, once again, to have contracted on both a monthly and annual basis, with real third-quarter 2008 growth almost assured of showing a quarterly contraction. Such would be the fifth consecutive quarter-to-quarter contraction and the third consecutive quarter of annual contraction. Such ongoing growth patterns never have been seen outside of formal recessions. 

Key to the recent, unbelievably positive growth reported for both first- and second-quarter GDP has been an equally incredulous improvement in the monthly trade data. The July trade deficit report, however, showed a deteriorating deficit, some catch-up in lagging oil import reporting and revisions to the services data for the last six months. A downward revision to first-quarter GDP should result from the new trade numbers, but not enough to turn the annualized 0.9% currently-reported growth negative, yet. The first-quarter GDP, however, will not be touched in revision until the next annual/benchmark revision, sometime in July 2009 or later. If the first-quarter turns negative, such would mean two consecutive quarterly contractions in real GDP, which remains the popular definition of a recession. The second-quarter GDP, however, has one revision to go, and the trade revisions could knock 0.3 percentage points off the 3.3% annualized growth currently reported. Despite any near-term deterioration reported in the trade picture, however, the third-quarter "advance" and "preliminary" estimates — the last estimates before the November election — are good bet to remain in heavily politicized positive territory.

Retail Sales Show Deepening Economic Downturn. The Census Bureau reported that seasonally-adjusted August retail sales fell by 0.27% (down by 0.90% net of revisions) +/- 0.6% (95% confidence interval) for the month, following a revised 0.49% (previously 0.12%) decline in July.  On a year-to-year basis, August retail sales growth softened to 1.56% from a revised July gain of 2.12% (previously 2.63%).  In terms of real growth, both the monthly and annual rates of change likely continued in contraction, dependent upon the upcoming CPI report (see below).

Core Retail Sales.  Consistent with the Federal Reserve’s predilection for ignoring food and energy prices, "core" retail sales — retail sales net of grocery store and gasoline station revenues — fell by 0.06% (down 0.70% net of revisions) in August, versus a revised 0.73% (was 0.33%) decline in July. Those numbers contrasted with the official aggregate drop of 0.27% in August and the revised 0.49% decline in July. On an annual basis, August "core" retail sales fell by 1.73% versus a revised July decline of 1.06% (previously down by 0.53%).

Trade Deficit Shows Lagging Oil Reporting. The Bureau of Economic Analysis and Census Bureau reported yesterday that the seasonally-adjusted monthly trade deficit for July widened to $62.2 billion from a revised $58.8 (previously $56.8 billion) in June. Other major revisions were published on the services sector, showing deeper than previously reported deficits going back to January. Potential impact of those revisions on GDP is discussed in the opening comments.

The current reporting also showed a rising level of import carryover (imports included in the current month that actually took place in earlier periods, when they should have been reported), with July carryover at $2.2 billion up from $0.2 (previously $1.4 billion) in June. Given also that physical oil import volume showed an unusually large and unseasonal surge in average barrels per day (bpd), the evidence for an understatement of oil imports in recent months continued to mount. July 2008 showed 11.033 million bpd of imports versus 9.918 million bpd in June; the same numbers in 2007 were 10.018 million bpd in July versus 10.735 million bpd in June. 

August PPI Annual Inflation Eased to 9.6% from 9.8%. The regularly volatile Producer Price Index (PPI) for finished goods contracted by a seasonally-adjusted 0.9% (1.6% unadjusted) in August, as reported today by the Bureau of Labor Statistics, thanks largely to the recent sharp decline in oil prices, against a reported July adjusted increase of 1.2% (1.4% unadjusted). Since the August monthly price swing pattern was about the same as last year, however, the annual rate of PPI inflation slowed only by 0.2 percentage points, to 9.6% from 9.8% in July.

CPI Outlook. Consensus estimates for Tuesday’s (September 16th) August CPI are for no change (briefing.com), reflecting recent declines in energy prices. Such is not unreasonable, although likely higher "core" inflation and strong seasonal-factor boosts to gasoline add some upside reporting risk to expectations.

It is important to note that even allowing for the effect of volatile gasoline prices on the physical volume of gasoline consumption, that the 2.5% decline in August gasoline station sales (retail sales) is less than my estimate (based on Department of Energy data) of a 5.9% decline in gasoline prices for August, reflecting the positive seasonal-factor effect that will help to mitigate the impact of lower energy costs on reported inflation. The question is as to the degree of that mitigation in the CPI.

Annual inflation would continue its upturn in August 2008 reporting, dependent on the seasonally-adjusted monthly gain exceeding the negligible 0.02% monthly increase seen in August 2007. While any increase likely will be small, an increase remains a fair shot.  The actual monthly difference would directly add to or subtract from July’s annual inflation rate of 5.60%.

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