Gasoline and Food Prices, and Seasonals, Helped Boost January Retail Sales. Rising gasoline and food prices — as suggested by increased gasoline station and grocery store revenues — accounted for 27% of the reported gain in monthly January retail sales, while increases in other prices likely accounted for a fair portion of the reported balance.  

What is not clear with the January retail numbers, yet, is the net impact from seasonal factors that have been heavily distorted by the longest and deepest economic contraction in the post-World War II era of modern economic reporting. Seasonal factors are estimated from trading patterns of recent years, with the heaviest emphasis on the trading patterns of the prior year. There is no question that the factors have distorted by the heavy downtrend a year ago in sales, and such raises significant issues as to the significance of the current, seasonally-adjusted monthly reporting. The seasonality issues should begin to work themselves out in the next several months of reporting. 

That said, before seasonal adjustment, the latest revisions to December and November retail sales were to the downside, yet after seasonal adjustment, the revisions were to the upside. Concurrent seasonal factor adjustments are being applied here as they are in other series such as the payroll series, where the seasonal factors get re-jiggered each month for the most recent reporting. Unadjusted, December 2009 retail sales revised from initial reporting of $409,231 billion to $408,991 billion, but seasonally-adjusted revised from $352,985 to $354,085 billion, a net positive swing of 0.4%. Unadjusted, November 2009 retail sales revised from initial reporting of $353,951 billion to $354,467 billion, but seasonally-adjusted revised from $352,985 to $354,085 billion, a net positive swing of 0.2%. While not large, these revised seasonally-adjusted data will add some upside pressure to the upcoming GDP revision — possibly some offset to the negative impact of the trade data discussed in Commentary No. 278 — instead of the downside pressure suggested by the unadjusted retail numbers.

Viewed differently, if consistent year-to-year changes (unadjusted year-to-year change in the latest reporting applied to the prior year’s seasonally-adjusted level) were used with both the unadjusted and the seasonally-adjustment numbers, January 2010 retail sales would have fallen by roughly 0.8% month-to-month, from $353.7 to $350.7 billion, instead of having gained 0.5%. Such an approach has limits to its meaningfulness, given comparative monthly variations in trading days (minimal for the months involved), which otherwise legitimately change the seasonal adjustment patterns.  

There also may be questions on sampling that parallel the surveying issues seen in the Bureau of Labor Statistics Birth Death Model, as discussed in Commentary No. 276, where companies that have gone out of business are assumed to be continuing. From an anecdotal standpoint, I know of at least five nearby retailers who have folded recently, including my barbershop and newsstand.

Given the signals for a softening economy generated by the year-to-year contraction in the real (inflation-adjusted) broad money supply, and by likely seasonal-factor distortions, the next couple of retail sales reports are at high risk of showing much weaker results.

Reported Nominal Retail Sales. Today’s (February 12th) January 2010 retail sales report — issued by the Census Bureau — indicated a statistically-insignificant, seasonally-adjusted monthly gain of 0.48% (up 0.79% net of revisions) +/- 0.6% (95% confidence interval). Such followed a revised 0.11% (previously 0.27%) monthly decline in December. The monthly gain was in line with early consensus estimates. On a year-to-year basis, the January 2010 retail sales were reported up by 4.71% from January 2009, versus a revised 5.54% (previously 5.36%) year-to-year gain in December 2009.

Real Retail Sales. Removing the effects of inflation, January 2010 retail sales activity likely will show both monthly and annual gains. The pattern of ongoing, inflation-adjusted activity, however, remains one of bottom-bouncing/plateauing at extremely low levels. Details will be updated and graphed with the Commentary following the tentatively scheduled February 19th release of the January CPI.

Core Retail Sales.  A change in "core retail sales" methodology was introduced five 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 revenues 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 — January retail sales net of total grocery store and gasoline station revenues — rose by 0.4% versus the official aggregate gain of 0.5%.    

Version II — January retail sales net of the monthly change in revenues for grocery stores and gasoline stations — rose by 0.3% versus the official aggregate gain of 0.5%. 

Week Ahead. CAUTION: Due to the weather-related disruptions to federal government operations, scheduled economic release dates remain at some risk of being delayed.  Given the underlying reality of a weaker economy (and likely re-intensifying downturn in the coming months) and more serious inflation problems than generally are expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Such is true especially for economic reporting net of prior-period revisions.

Housing Starts (January 2010). The January housing starts, due for release on Wednesday, February 17th, likely will continue bottom bouncing, with a likely statistically-insignificant month-to-month change.     

Industrial Production (January 2010). Due for release on Wednesday, February 17th, reporting risk for January industrial production generally is to the downside of a strong 0.8% consensus per Briefing.com.

Producer Price Index (January 2010). The PPI is due for release on Thursday, February 18th. January inflation data usually takes a fair hit from seasonal adjustments, since a number of companies tend to time price changes for January 1st. Nonetheless, the surging price component of the purchasing managers manufacturers survey suggests positive movement in this otherwise somewhat randomly volatile series.  

Consumer Price Index (January 2010). The CPI is due for release on Friday, February 19th. As with the PPI, January CPI inflation data usually takes a fair hit from seasonal adjustments. The rising prices indicated from the monthly strength in gasoline and grocery sales in the retail sales numbers also suggest a positive reading for the seasonally-adjusted monthly CPI, with some upside reporting risk to a consensus forecast of 0.3% (Briefing.com).

Year-to-year inflation would increase or decrease in January 2010 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.28% adjusted monthly gain seen in January 2009.  I use the adjusted change here, since that is how consensus expectations are expressed. To approximate the annual inflation rate for January 2010, the difference in January’s headline monthly change versus the year-ago monthly change should be added to or subtracted directly from December 2009’s annual inflation rate of 2.72%. A consensus result would leave annual inflation near 2.7%

DELAYED — GAAP-Based Financial Statements of the U.S. Government (2009). The Treasury’s GAAP financial statements tentatively now are scheduled for release on Friday, February 26th. The statements were delayed, without explanation, from the regularly scheduled release date of December 15, 2009. A Reporting Focus Commentary will follow after I have had a chance to assess the report. A table of what I expect in the summary reporting is available in the Hyperinflation Special Report.