No. 687: December Retail Sales

COMMENTARY NUMBER 687
December Retail Sales

January 14, 2015

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Weakest Since 2008 Economic Collapse, Plummeting Holiday Retail Sales
Reflected Liquidity-Restrained Consumers

December Sales Plunged by a Statistically-Significant 0.9% (-0.9%),
Down by 1.4% (-1.4%) before Prior-Period Downside Revisions

Monthly Sales Contraction Will Hold in Real Terms,
Net of Inflation, Despite Falling Gasoline Prices

Annual Growth Again at Traditional Recession Level

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PLEASE NOTE: The next Regular Commentary is scheduled for Friday, January 16th, covering the December CPI, PPI and industrial production. Publication of the Special Commentary will follow in the next day or so; its posting will be advised by e-mail.

Best Wishes to all — John Williams

OPENING COMMENTS AND EXECUTIVE SUMMARY

Headline Retail Sales Reporting Falter Anew. Six months of nonsensical, election-related reporting of a booming-economy, based on headline GDP numbers, have been accompanied by a period of mixed and increasingly unstable headline reporting of retail sales and industrial production. Today’s (January 14th) reporting of December 2014 nominal retail sales reflected a statistically-significant shift back towards the reporting of underlying economic reality. Negative headline reporting, as seen here, increasingly should become the norm in the months ahead, not only for retail sales, but also with parallel shifts in industrial production, and in patterns of accelerating economic downturn in other series, ranging from housing to new orders for durable goods. Reporting in these underlying data also should squeeze a little bit of the gimmicked, positive assumptions out of near-term GDP reporting.

The all-important Holiday Season was a bust for retailers, and the ongoing, underlying structural-liquidity issues constraining consumer activity largely were at fault. An updated review of the broad economic picture will be found in the Special Commentary, which is due for publication in the next day or so.

Today’s Missive (January 14th). Today’s brief Commentary concentrates on the detail from the nominal December 2014 retail sales report. The Week Ahead section highlights pending reporting of the December industrial production and the CPI and PPI inflation numbers.

Given new material in the pending year-end Special Commentary, today’s missive excludes any general review of economic activity, as well as the usual Hyperinflation Summary. The latest Hyperinflation Summary can be found in Commentary No. 684, and it will be updated post-Special Commentary.

Nominal Retail Sales—December 2014—Weakest Holiday Retail Sales since the 2008 Economic Collapse. The headline decline of 0.9% (-0.9%) in December retail sales, combined with a downwardly-revised 0.4% gain in November activity, showed retail sales in the 2014 Holiday Season to be the weakest in six years, since the 2008 period of ongoing economic collapse.

On an annual basis, the November-December Holiday Season is the dominant sales period for retail outlets. December’s decline in seasonally-adjusted monthly sales was seen across most retail sectors. Weaker sales were seen at electronics and appliances; clothing; sporting goods, hobbies, books and music; general merchandise; and nonstore retailers. Auto and gasoline sales also dropped, as did sales at building material and garden equipment dealers. Gains were seen related to food (grocery stores and eating establishments), drug stores and pharmacies, and for furniture stores.

The underlying problem here remains ongoing structural liquidity constraints on the consumer. That circumstance continues to prevent a normal recovery in broad U.S. economic activity.

Nominal (Not-Adjusted-for-Inflation) Retail Sales—December 2014. Headline nominal retail sales declined month-to-month, by a statistically-significant, seasonally-adjusted 0.94% (-0.94%). Such was in the context of downside revisions to headline activity in October and November. Net of the prior-period revisions, the December decline was 1.41% (-1.41%) for the month.

The headline monthly decline in December was against a revised, statistically-significant gain of 0.41% (previously up by 0.72%) in November, and versus a revised 0.33% (previously 0.51%, initially a 0.72%) monthly gain in October.

Annual Change. Year-to-year sales growth in December 2014 slowed to a still statistically-significant gain of 3.17%, versus a revised annual gain of 4.70% (previously 5.13%) in November, and a revised 4.33% (previously 4.52%, initially 4.14%) gain in October. Net of inflation, annual growth in December 2014 likely dropped again into traditional recession territory.

The pace of annualized nominal (not adjusted for inflation) retail sales in fourth-quarter 2014 slowed sharply versus earlier estimates. Based on the initial headline reporting for November, fourth-quarter sales were growing at an annualized pace of 4.14%, versus 4.27% in the third-quarter. Based on the headline December reporting and downside revisions to November and October activity, fourth-quarter sales now are growing at an annualized nominal pace of 1.77%, versus 4.27% in the third-quarter.

Real (Inflation-Adjusted) Retail Sales—December 2014. The headline 0.94% (-0.94%) contraction in December 2014 retail sales was before accounting for inflation. Real retail sales growth December (net of inflation), will be reviewed along with the headline estimate of consumer inflation for December 2014 CPI-U in the Regular Commentary (likely No. 689) of Friday, January 16th.

Thanks to falling gasoline prices, December headline inflation should be in monthly contraction, with a resulting positive impact, in real terms, on top this morning’s headline nominal-retail sales contraction rate. The decline in headline December CPI inflation, however, should be well shy of what would be needed to turn headline real December 2014 retails sales to the plus-side for the month (see Week Ahead section). Separately, net of what still will be positive year-to-year CPI inflation, real annual growth in December retail sales likely dropped again, into traditional recession territory, which will be discussed along with the CPI release.

Liquidity Constraints Impair Consumer Economic Activity. Recently discussed in Commentary No. 684, and as explored further with new detail in the pending Special Commentary, during the last six-plus years of economic collapse and stagnation, consumer buying of goods and services has been constrained by the intense, structural-liquidity woes besetting the consumer. Indeed, impaired consumer liquidity remains the primary structural issue preventing meaningful, domestic U.S. economic growth. Without real growth in income, and without the ability and/or willingness to offset declining purchasing power with debt expansion, the consumer lacks the ability to fuel traditional, consumption-based growth or recovery in U.S. economic activity, including not only retail sales and the still-dominant personal-consumption account of the GDP, but also residential investment and related construction spending.

[Further background detail on the Retail Sales is included the Reporting Detail, although much of the headline-detail text there is repeated in the Opening Comments. Various drill-down and graphics options on headline Retail Sales data also are available to subscribers at our affiliate: www.ExpliStats.com].

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REPORTING DETAIL

RETAIL SALES (December 2014)

Weakest Holiday Sales since the 2008 Economic Collapse. The headline decline of 0.9% (-0.9%) in December retail sales, combined with a downwardly-revised 0.4% gain in November activity, showed retail sales in the 2014 Holiday Season to be the weakest in six years, since the 2008 period of ongoing economic collapse.

The underlying problem here remains ongoing structural liquidity constraints on the consumer. That circumstance continues to prevent a normal recovery in broad U.S. economic activity.

Nominal (Not-Adjusted-for-Inflation) Retail Sales—December 2014. In nominal terms—before adjustment for consumer inflation—today’s (January 14th) report on December 2014 retail sales—issued by the Census Bureau—showed a statistically-significant, seasonally-adjusted, headline monthly decline of 0.94% (-0.94%) +/- 0.58% (this and all other confidence intervals are expressed at the 95% level). Such was in the context of downside revisions to headline activity in October and November. Net of the prior-period revisions, the December decline was 1.41% (-1.41%) for the month.

The headline monthly decline in December was against a revised, statistically-significant gain of 0.41% +/- 0.12% (previously up by 0.72%) in November, versus a revised 0.33% (previously 0.51%, initially a 0.72%) monthly gain in October.

Annual Change. Year-to-year sales growth in December 2014 slowed to a still statistically-significant gain of 3.17% +/- 1.05%, versus a revised annual gain of 4.70% (previously 5.13%) in November, and a revised 4.33% (previously 4.52%, initially 4.14%) gain in October. Net of inflation (see Real Retail Sales section) annual growth in December likely dropped again into traditional recession territory.

December Core Retail Sales—Still-Tumbling Gasoline Prices. In an environment of generally rising food prices, and with a further, unadjusted 12.18% (-12.18%) decline in monthly gasoline prices, seasonally-adjusted monthly grocery-store sales rose by 0.40% in December, with gasoline-station sales falling by 6.50% for the month.

Under normal conditions, 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 preference for ignoring food and energy prices when “core” inflation is lower than full inflation—are estimated using two approaches:

Version I: December 2014 versus November 2014 seasonally-adjusted retail sales series—net of total grocery store and gasoline station sales—reflected a monthly contraction of 0.46% (-0.46%), versus the official headline decline of 0.94% (-0.94%).

Version II: December 2014 versus November 2014 seasonally-adjusted retail sales series—net of the monthly change in revenues for grocery stores and gas stations—reflected a monthly contraction of 0.37% (-0.37%), versus the official headline decline of 0.94% (-0.94%).

Thanks to falling gasoline prices, December headline inflation should be in monthly contraction, with a resulting positive impact likely, in real terms, on top this morning’s headline nominal-retail sales contraction rate. The decline in headline December CPI inflation, however, should be well shy of what would be needed to turn headline real December 2014 retails sales to the plus-side for the month (see Week Ahead section). Separately, net of what still will be positive year-to-year CPI inflation, real annual growth in December retail sales likely dropped again, into traditional recession territory, which will be discussed along with the CPI release.

Reporting Instabilities and Distortions. The usual seasonal-factor distortions were at play, again, in December reporting, where the headline data reflected concurrent seasonal adjustments. Given Census Bureau reporting procedures, the headline detail is not comparable with most earlier reporting. Accordingly, current data can reflect growth shifts from earlier periods, without the specifics being published.

As has been the common pattern, the year-ago numbers for November and December 2013 were revised, along with the publication of the December 2014 data and revised detail on October and November 2014. The November and December 2013 revisions simply were junk reporting, due solely to shifts in their seasonal adjustments that resulted from the calculation of the unique seasonal factors producing the headline December 2014 detail, not due to the availability of any new historical data back in 2013. Where all other seasonally-adjusted historical numbers also were revised, though, those details were not published. Only the new details for October and November 2013 were provided for the earlier numbers.

Specifically, a 0.07% (-0.07%) downside revision to November 2013 and a 0.35% upside revision to December 2013 sales indicated meaningful shifts in current headline seasonal-adjustment factors. They likely were enough to mitigate the headline December contraction by 0.4%, to the headline 0.9% (-0.9%) drop, instead of what otherwise would have been a 1.3% (-1.3%) decline, but still without the specifics as to where headline activity was being shifted month-to-month. Full detail is available internally to the Census Bureau, but the Bureau chooses not publish the detail.

The current reporting process allows for invisible shifts in seasonally-adjusted current activity, which are not consistent with published historical reporting. Further, the stability of the seasonal-adjustment process (particularly the concurrent-seasonal-adjustment process used with retail sales) and sampling methods have been disrupted severely by the unprecedented depth and length of the current economic downturn in the post-World War II era, the period of modern economic reporting.

Retail sales reporting suffers the same inconsistency issues seen with other series, such as payroll employment, the unemployment rate, and durable goods orders. The highly variable and unstable seasonal factors here continued to cloud relative activity in the October 2014-to-December 2014, and in the November 2013-to-December 2013 periods, five months that are published on a non-comparable basis with all the other historical data.

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WEEK AHEAD

Against Overly-Optimistic Expectations, Economic Releases and Revisions in the Months Ahead Should Trend Much Weaker; Inflation Releases Should Be Increasingly Stronger after the Impact of Temporary Oil-Price Declines. Shifting some to the upside, again, from the downside, amidst wide fluctuations in the numbers, market expectations for business activity remain overly optimistic in the extreme. They exceed any potential, underlying economic reality. Downside corrective revisions and an accelerating pace of downturn in broad-based headline economic reporting should hammer those expectations in the next several months. Recent GDP excesses, however, will not face downside revisions until the July 30, 2015 benchmark revision to that series (see Commentary No. 684).

Headline consumer inflation—dominated by gasoline and other oil-price related commodities—should hit a near-term bottom in the next two months. Significant upside inflation pressures should resume when oil prices begin their rebound, a process that should be accelerated rapidly by an eventual sharp downturn in the exchange-rate value of the U.S. dollar. These areas, the general economic outlook and longer range reporting trends are reviewed broadly in the pending Special Commentary.

A Note on Reporting-Quality Issues and Systemic-Reporting Biases. Significant reporting-quality problems remain with most major economic series. Beyond gimmicked changes to reporting methodologies of the last several decades, ongoing headline reporting issues are tied largely to systemic distortions of seasonal adjustments. Data instabilities were induced partially by the still-evolving economic turmoil of the last eight years, which has been without precedent in the post-World War II era of modern economic reporting. The severity and ongoing nature of the downturn provide particularly unstable headline economic results, when concurrent seasonal adjustments are used (as with retail sales, durable goods orders, employment, and unemployment data). Combined with recent allegations (see Commentary No. 669 of Census Bureau falsification of data in its monthly Current Population Survey (the source for the Bureau of Labor Statistics’ Household Survey), these issues have thrown into question the statistical-significance of the headline month-to-month reporting for many popular economic series. Again, new issues tied to GDP reporting are discussed in the pending Special Commentary and in Commentary No. 684.

PENDING RELEASES:

Producer Price Index—PPI (December 2014). The December 2014 PPI is scheduled for release tomorrow, Thursday, January 15th by the Bureau of Labor Statistics (BLS). Detail, however, will be covered in ShadowStats Regular Commentary (likely No. 689) of Friday, January 16th.

Reflecting a continued collapse in oil prices, consensus expectations are for a 0.4% (-0.4%) month-to-month contraction [Bloomberg] in December, double the pace of the headline, seasonally-adjusted monthly contraction of 0.2% (-0.2%) in November. Such expectations are reasonable, under the circumstances.

The energy sector, once again, should be the dominant downside component in the headline monthly data. Based on the two most widely followed oil contracts, not-seasonally-adjusted, monthly-average oil prices fell by 21.5% (-21.5%) and by 21.8% (-21.8%) in the month of December, along with a 12.2% (-12.2%) monthly drop in unadjusted average retail-gasoline prices. PPI seasonal adjustments for energy costs in December should provide negligible offset to the unadjusted plunge in energy-related prices.

Inflation in food, “core” goods (everything but food and energy), and some still spreading inflationary impact from hard-goods into the soft-services sector, or dropping costs helping to increase margins, could be mitigating factors, again.

The wildcard in this revamped PPI remains the recently-added services sector, which largely is unpredictable, volatile and of limited meaning, due to its inflation measurements having minimal relationship to real-world activity. Nonetheless, this new services sector has a greater weighting in the PPI calculation than does the goods sector

The services series, in theory, is much-less dependent on the increasingly “antiquated” concepts of oil, food and “core” (ex-food and energy) inflation of the “hard” production-based economy. Yet, services costs recently had reflected spreading, general inflationary pressures—and shrinking profit margins—from rising prices in that hard economy. That reversed some with lower energy costs boosting margins. Where rising margins are counted as inflationary in the new system, energy costs falling faster than rising sales prices actually have the potential to widen margins and generate upside inflation surprises in the December headline reporting. This general approach to "wholesale" inflation remains of questionable merit.

Consumer Price Index—CPI (December 2014). The December 2014 CPI is scheduled for release on Friday, January 16th, by the Bureau of Labor Statistics (BLS). The headline CPI-U should contract month-to month, reflecting the sharp drop in gasoline prices. Expectations of a headline monthly contraction in December have deepened to 0.4% (-0.4%) [Bloomberg] for the CPI-U, and they are not unreasonable. In the CPI-W, which is more heavily weighted for gasoline, the headline monthly decline could be greater. As oil prices bottom out in the near future, however, so too should gasoline and its current negative impact on the headline CPI-U.

Plunging again, average gasoline prices fell by 12.18% (-12.18%) month-to-month in December, on a not-seasonally-adjusted basis, per the Department of Energy (DOE). While BLS seasonal adjustments to gasoline prices should be positive in December, they still should leave adjusted monthly gasoline prices down by roughly 10.3% (-10.3%) or so for the month. By itself, such an adjusted decline in gasoline prices would leave the headline CPI-U down by something shy of 0.5% (-0.5%).

Higher food and “core” (net of food and energy) inflation, however, still should offset some of the negative energy number, leading to a headline monthly contraction of 0.3% to 0.4% (-0.3% to -0.4%) in the December CPI-U.

Annual Inflation Rate. Year-to-year, CPI-U inflation would increase or decrease in December 2014 reporting, dependent on the seasonally-adjusted monthly change, versus an adjusted 0.24% monthly inflation reported for December 2013. The adjusted change is used here, since that is how consensus expectations are expressed. To approximate the annual unadjusted inflation rate for December 2014, the difference in December’s headline monthly change (or forecast of same), versus the year-ago monthly change, should be added to or subtracted directly from the November 2014 annual inflation rate of 1.32%. For example, if the headline, seasonally adjusted CPI-U declined month-to-month by 0.3% (-0.3%), unadjusted annual inflation would fall to about 0.8%.

Index of Industrial Production (December 2014). On Friday, January 16th, the Federal Reserve Board will release its estimate of the December 2014 index of industrial production. Late market expectations have weakened, now indicating an outright monthly contraction for headline December production of 0.1% (-0.1%) [Bloomberg]. Risks are high for a downside surprise to expectations in the headline reporting, very possibly a much deeper monthly contraction and/or significant downside revisions to prior reporting of recent months.

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