Prior-Period Downside Revisions Helped to Narrow Reported 0.5% Monthly Contraction. As seen in this month’s retail sales reporting, late responses to the government’s economic surveys again are tending to come in weaker than the relatively positive assumptions used in putting together the initial monthly reports on key data. Previously reported levels of activity tend to be revised lower as a result. This pattern likely will be repeated in the months ahead, until such time as the assumptions used in reporting, catch up with the underlying weakness in the economy.

Reported Nominal Retail Sales.  Receiving a relative boost from weaker levels of activity being revised into earlier reports of monthly data, today’s (July 14th) June 2010 retail sales report — issued by the Census Bureau — indicated a statistically-insignificant, seasonally-adjusted monthly decline of 0.51% +/- 0.6% (95% confidence interval). Reported June sales were down by 0.65% versus initial May reporting, before the impact of prior-period revisions. Similarly, May’s initial contraction of 1.20% was revised to 1.09%, but against April data, as published last month, May sales declined 1.34% before today’s prior-period revisions.  

On a year-to-year basis, June 2010 retail sales were reported up by 4.80% from June 2009, continuing a trend of slowing annual growth, versus a revised annual May gain of 6.86% (previously 6.91%) and a revised 8.71% (previously  8.98%) annual increase in April. Annual changes still are working off the effects of the severe trough in activity seen somewhat over a year ago.

Real Retail Sales.  Estimates of real (inflation-adjusted) retail sales will be published on Friday, July 16th, in the Commentary following the release of the June CPI data. Month-to-month real change in retail sales for June likely remained in contraction, with real annual growth coming in around a positive 3.5%.

Core Retail Sales.  Assuming that the bulk of non-seasonal variability in food and gasoline sales is in pricing, instead of demand, "core" retail sales — consistent with the Federal Reserve’s predilection for ignoring food and energy prices when "core" inflation is lower than full inflation — are estimated using two approaches:

Version I: June versus May seasonally-adjusted retail sales — net of total grocery store and gasoline station revenues — eased by 0.3%, versus the official aggregate loss of 0.5%.

Version II: June versus May seasonally-adjusted retail sales — net of the monthly change in revenues for grocery stores and gasoline stations — declined by 0.2% versus the official aggregate loss of 0.5%. 

May Trade Deficit Hits 18-Month High, a 16-Month High Net of Inflation (Oil Price) Impact. For May 2010, the Bureau of Economic Analysis (BEA) and the Census Bureau reported yesterday (July 13th) that the nominal (not-adjusted-for-inflation) seasonally-adjusted monthly trade deficit in goods and services rose to $42.3 billion — the largest monthly trade shortfall since November 2008 — up from an unrevised $40.3 billion in April, and up sharply from the $24.9 billion monthly deficit in May 2009.

Against April 2010, the May trade balance showed both higher imports and exports, with a sharper increase in imports, largely independent of oil impact. May oil imports reflected both lower physical volume and oil prices. Specifically, for the month of May 2010, the not-seasonally-adjusted average price of imported oil was $76.93 per barrel, versus $77.13 in April 2010 and $51.30 in May 2009. In terms of not-seasonally-adjusted physical oil imports, May 2010 volume averaged 9.033 million barrels per day, versus 9.804 million in April 2010 and 8.429 million in May 2009.

Real (Inflation-Adjusted) Trade Deficit. A widening trade deficit directly reduces the reported level of and growth in GDP. The May trade deficit magnified April’s bad news for the upcoming "advance" second-quarter estimate, with the pick-up in the merchandise trade shortfall likely to reduce GDP growth by 1.0% from what it would have been otherwise.

As reported by the BEA, adjusted for seasonal factors and inflation (2005 chain-weighted dollars as used in reporting real GDP), the January, February and March 2010 respective merchandise trade deficits were not revised, holding at $39.5, $43.2 and $44.1 billion, an annualized pace in first-quarter 2010 of $507.3 billion. On the same basis, the April deficit revised to $44.2 (previously $44.3 billion), with May reported at $46.0 billion. The annualized merchandise deficit for second-quarter 2010, based on April and May reporting, was $541.3, a net deterioration of $34 billion, which, by itself would reduce the upcoming annualized real GDP growth rate by 1.0%. Important here is that this series is just merchandise sector, which eventually has a paper trail behind it, from reporting by U.S. Customs. It does not include the services area, which largely is a guesstimate by the BEA, and which traditionally runs a smaller offsetting surplus to the merchandise deficit.   

Week Ahead. Given the unfolding reality of a weaker economy (or re-intensifying downturn) 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. Increasingly, that will be seen especially for economic reporting net of prior-period revisions.

Industrial Production (June 2010). Due for release on Thursday, July 15th, June industrial production is expected to be flat, with the consensus having softened from a 0.2% monthly gain, last week (Briefing.com), versus an initial estimate of a 1.3% gain in May. As with most economic series — until the consensus begins to catch up with weakening reality — reporting risk is to the downside of expectations.

Producer Price Index — PPI (June 2010). Reflecting the spread of inflationary pressures from earlier oil-price strength and otherwise, and from shifting seasonal adjustment factors, expectations are for a monthly decline of 0.1% in the June PPI, which has dropped from a consensus last week of a 0.1% gain (Briefing.com), versus a 0.3% contraction in May. The series is irregularly volatile, but has some upside reporting risk.

Consumer Price Index — CPI (June 2010). A small gain in monthly oil prices, but a decline in gasoline prices should dampen the seasonally-adjusted monthly change in the June CPI-U, due for release on Friday, July 16th, while the seasonal-factor biases on gasoline prices turn from negative to flat/positive. Briefing.com reports a consensus expectation of a 0.1% contraction, down from 0.0% last week, versus the 0.2% monthly decline reported in May. The reported number could go either way against the consensus, but with risk somewhat to the upside. The shifting seasonal factors will begin spiking adjusted gasoline prices sharply to the upside in July.

Year-to-year inflation would increase or decrease in June 2010 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.71% adjusted monthly gain seen in June 2009. I use the adjusted change here, since that is how consensus expectations are expressed. To approximate the annual inflation rate for June 2010, the difference in June’s headline monthly change (or forecast of same) versus the year-ago monthly change should be added to or subtracted directly from May 2010’s reported annual inflation rate of 2.02%. Hence a consensus, 0.1% contraction in month-to-month seasonally-adjusted CPI-U would result in an annual inflation rate of roughly 1.2%.