JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 COMMENTARY NUMBER 258
October Retail Sales

November 16, 2009

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Reported October Retail Sales Boosted by Revisions and Inflation

Third-Quarter GDP Growth May See Some Downward Revision

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PLEASE NOTE: This Commentary provides a brief update of today’s October retail sales reporting. A subsequent Commentary, including an updated economic outlook, will be published on Wednesday (November 18th), following the release of the October CPI and housing starts and tomorrow’s (November 17th) reporting of October PPI and industrial production.

– Best wishes to all, John Williams

Third-Quarter GDP May Face Some Downside Revision. In conjunction with the greater-than-expected widening of the third-quarter trade deficit, today’s downside revision to third quarter retail sales has added a little more pressure for a downside revision in the "second" estimate of third-quarter GDP, due on November 24th. Part of the problem with the widening third-quarter trade deficit was an increase in automobile imports. To the extent that any retail sales boost in recent months attributed to the cash-for-clunkers program was from the sale of imported vehicles, the import of those automobiles should be directly offset in GDP accounting by deteriorating net exports.  

  

October Retail Sales Boosted by Downside Prior-Period Revisions. This morning’s (November 16th) Census Bureau report showed a statistically-significant monthly increase of 1.37% (0.81% net of revisions) +/- 0.6% (95% confidence interval) in seasonally-adjusted October retail sales. Such followed a downwardly revised 2.29% (previously 1.49%) monthly decline in September. 

Suggestive of reporting-quality issues, the magnitude of the downside revisions to September (heavily in motor vehicle sales) exceeded the 95% confidence interval. 

On a year-to-year basis, the October year-ago comparison was against collapsing gasoline prices and gasoline station sales. October 2009 retail sales were reported down by 1.74% from October 2008, following a revised annual decline of 6.31% (was 5.67%) in September.

Real Retail Sales. Removing the effects of inflation, October retail sales activity should show a monthly gain, but an annual contraction. The pattern of ongoing, inflation-adjusted activity remains one of bottom-bouncing/plateauing at extremely low levels. Details will be updated and graphed with the Commentary following the CPI release on Wednesday (November 18th).

Core Retail Sales.  A change in "core retail sales" methodology was introduced two months ago, where the net relative monthly increases and/or decreases in gasoline station and grocery store sales were subtracted from the full monthly retail sales number, instead of the total of gasoline station and grocery store sales each month. Assuming that the bulk of non-seasonal variability in food and gasoline sales is in pricing, instead of demand, the revamped reported "core" change more closely reflects the actual retail sales experience. This remains a work in progress and eventually will be used in the development of additional SGS alternative economic measures.

For the near-term, the "core" retail sales is reported in two versions, where Version I uses the original methodology, and Version II version appears to provide a more balanced picture of the impact food and energy inflation in the standard retail sales reporting.

Consistent with the Federal Reserve’s predilection for ignoring food and energy prices when "core" inflation is lower than full inflation, "core" retail sales:

Version I — October retail sales net of total grocery store and gasoline station revenues — rose by 1.7% (1.0% net of revisions) versus the official aggregate gain of 1.4%.    

Version II — October retail sales net of the monthly change in grocery store and gasoline station revenues — rose by 1.3% (0.8% net of revisions) versus the official aggregate gain of 1.4%. 

Week Ahead. Given the underlying reality of a weaker economy and a more serious inflation problem than generally is expected by the financial markets, risks to reporting will favor higher-than-expected inflation and weaker-than expected economic reporting in the month ahead. Such is true especially for economic reporting net of prior-period revisions.

Index of Industrial Production (October 2009). Due for release tomorrow (Tuesday, November 17th), October industrial production is expected to rise by 0.3% for the month (Briefing.com), versus a 0.7% gain reported in September. Risk is fairly high of a downside surprise here, particularly including a possible downward revision to the September estimate.

Producer Price Index (PPI) (October 2009).  Due for release tomorrow (Tuesday, November 17th), the monthly PPI change is irregularly volatile. Expectations appear to be on the negative side of flat for the month-to-month number, but annual inflation should see some pick-up (less negative) in October, turning positive in November or December reporting.

Consumer Price Index (CPI) (October 2009). Due for release on Wednesday (November 18th), the month-to-month CPI-U is expected to show a 0.2% increase, per Briefing.com. Due to the sharp reversal of oil and gasoline price trends — in collapse one year ago — annual CPI-U inflation should come close to flattening out in October reporting, though remaining in negative territory. With an upside surprise to the monthly inflation number, which is possible, annual inflation could turn positive, once again, as early as the October report.

More likely, though, annual CPI-U will surge back into positive territory with November’s reporting. For October 2009, gasoline prices were down about 16% year-to-year, per Department of Energy estimates. November is shaping up as a 20% year-to-year gain. Even with no month-to-month inflation in November 2009 (a positive monthly number is likely), the annual CPI-U inflation should jump from slightly negative territory in October to more than a 1% annual gain in November.      

Annual inflation would increase or decrease in October 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.82% adjusted monthly decline seen in October 2008.  I use the adjusted change here, since that is how consensus expectations are expressed. The difference in growth would directly add to or subtract from September’s annual inflation rate of negative 1.29%. Consensus results would push annual inflation to roughly a negative 0.3% in October from the negative 1.3% reported in September.

Housing Starts (October 2009). Due for release on Wednesday (November 18th), the pattern of statistically meaningless monthly changes, with the level of activity holding at historically low levels, should continue.

   

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