The latest retail sales data suggests consumer strength, making economists more optimistic that economic growth will be even stronger this year. In other words:
“It’s been two years since the weather forecasters felt this good. economic outlook. In the latest quarterly survey by the Wall Street Journal, Business and academic economists have lowered the chance of a recession within the next year from 39% to 29%. In the January survey. This is the lowest probability since April 2022, when the probability of recession was set at 28%.
economist I don't think the economy will move any closer to recession. In January, it expected growth to average less than 1% in the first three quarters of this year. They now expect growth this year to bottom out at an inflation-adjusted 1.4% in the third quarter. ” –WSJ
March retail sales data shows consumer spending further increased “fuel” Economists are excited about this year.
The Commerce Department reported Monday that consumers were undeterred despite rising inflation in March and continued shopping at a faster-than-expected pace. Retail sales rose 0.7% for the month, below February's upwardly revised 0.9%, but well above the Dow Jones consensus estimate for a 0.3% increase. Census Bureau data shows that while it is adjusted for seasonality, it is not adjusted for inflation. ” – CNBC
The graph below shows the monthly changes in retail sales data over the past two years.
While mainstream economists tout consumer strength, there were some interesting points worth noting in March's retail sales data.
First, retail sales data was very weak from October through January, traditionally the strongest shopping months of the year. That period included Halloween, Thanksgiving, Christmas, and New Year's. So, to some extent, the strength in spending over the past two months is unsurprising, as consumers ultimately need to purchase goods and services that were previously postponed.
Second, while March's retail sales data was strong, it was weaker than February. However, March includes two important spending periods that don't normally occur: Spring Break and Easter. Spring break and Easter are times of high travel and shopping, so it's not surprising that retail sales data increased as oil prices rose. As shown below, there is a very high correlation between nominal retail sales and oil prices.
pay more for the same amount
Economists often overlook another important point about retail sales data. As mentioned above, the March retail sales report is not adjusted for inflation.Moreover, the report is nominal “Dollar Volume” It is not the quantity of goods or services sold. Oil and gasoline prices are a good example of the problem with retail sales data.
Let's assume you own a car with an 18-gallon fuel tank. Your daily activities mainly include going to work, going to the grocery store, eating out, and having entertainment. Therefore, it consumes one tank of gas every week. The calculation is as follows:
Week 1: 18 gallons of gas @ $3/gallon = $54.
That week, the store sells 18 gallons of gasoline, which adds $54 to its total monthly retail sales. However, the price will increase to $4 per gallon next week.
Week 2: 18 gallons of gas @ $4/gallon = $72.
Here's a question.
Retail sales data increased by $18 in the second week, but did consumers buy more gasoline? In other words, the strength of the economy ultimately depends on how much we produce. If it is measured, (GDP), So does spending more for the same amount of goods and services mean a stronger economy?
The picture is quite different when the nominal retail sales data are adjusted for inflation. Again, it's no surprise that inflation-adjusted retail sales rose in February after falling for the previous four months. But because March includes spring break and Easter, the data suggests the consumer slump touted in the headlines.
It's worth noting that retail sales data isn't very helpful in determining whether an economy is approaching a recession. As shown below, an annual growth rate of 2% is a good indicator of economic growth. Therefore, given that personal consumption spending accounts for about 70% of the economic equation, retail sales should also grow at about 2% per year. However, retail sales outside of 2007 do not reveal economic strength.
In other words, spending more for the same amount of goods and services is not a sign of economic strength.
Economic forecasts are fallible
Additionally, while recent nominal sales data has been strong, it's important to remember that economic data lags significantly.Each date below indicates an economic growth rate Right before the recession started. This table shows that real GDP growth has been above 2% in seven of the past 10 recessions. In other words, according to the media, the answer was “no.” signs of recession. But the next month, new events began.
Importantly, we are not saying that a recession will start next month. However, I would suggest that relying heavily on one month of retail sales data to claim that the economy has avoided recession is probably not ideal. Let's take another look at the WSJ economic forecast graph. The start and end of the recession, and he added two notations when the NBER officially dated the period. As both past recessions have shown, WSJ economists thought the probability of an economy entering a recession was very low right before it entered.
In fact, inflation-adjusted retail sales data suggests that consumer sentiment remains weak. Spending more to buy the same amount of goods and services looks good on paper, but the average household has less money to spend on other things. As shown, the annual rate of change in real retail sales is near the lowest level outside of recessions.
Finally, consumer credit, which supports retail sales, will become even more problematic as interest rates rise. Higher interest rates tend to reduce the average growth rate of retail sales data.
Our advice is to remain cautious about the economic boom. These predictions are often disappointing.
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Editor's note: The summary bullet points in this article were selected by Seeking Alpha editors.