Retail Sales Might Look Lousy, But They're Not Pointing Toward Recession Today

America's weak economic recovery got some bad news lately, but the retail sector isn't a cause for concern just yet.

Jun 12, 2014 at 4:30PM

Last month, the U.S. Commerce Department disappointed economists with a monthly retail sales report that showed barely any sales growth from March to April. Despite the disheartening numbers, American markets chugged along, with the Dow Jones Industrial Average (DJINDICES:^DJI) gaining a few points. Today the Commerce Department reported another disappointing month of retail sales, with May's sales showing another barely there gain of 0.3% over April's adjusted result. But this time the Dow responded by falling 0.7% on the day, even with another boost to the prior month's growth rate -- last month upped March's month-over-month gain, and this report pushed April's growth rate from 0.1% to 0.5%. There were other reasons for the slide, but a weakening economy is always in the back of investors' minds.

Here's what month-over-month growth has looked like over the past five years:

Retailallmay
Source: U.S. Department of Commerce.

As usual, there's a lot of noise in the month-to-month changes, but what's clear is that the auto industry continues to, ah, drive American retail growth (pardon the pun). Core retail sales, which exclude auto and gas-station sales, were effectively flat month over month in May, and over the past five years core retail sales have only grown more than 1% month over month on a handful of occasions. Only one of those months -- this past April -- took place in the past year:

Retailcoreapr
Source: U.S. Department of Commerce.

Since there are no longer any automakers on the Dow, it falls to energy giant Chevron (NYSE:CVX) to carry the torch for this purportedly higher-growth part of the retail economy. Chevron is the Dow's big winner today, at a modest 0.8% improvement at the end of trading. We'll examine the reasons for this tepid performance in more detail in just a moment, but it's more important right now to examine retail sales on a longer timeline, to assess the growth that takes place from year to year. In this case, at least, retail sales -- both with and without auto sales -- now appear to be turning around a years-long slide in growth rates that began after the sharp rebound following the end of the financial crisis:

Corevsallretailmay
Source: U.S. Department of Commerce.

Let's treat this rebound with appropriate caution, as it is far from the first time that year-over-year retail sales have dipped into a short-term trough only to put together a few months of stronger growth. It's going to take more than a few good months in the spring to reverse a clear trend back to zero growth, but it's also important to remember that year-over-year growth rates need not dip into negative territory to signal a possible recession -- unlike 2008's implosion, the post-dot-com slowdown recorded only one month of year-over-year sales declines, which took place in September 2001.

However, based on the sector-by-sector breakdown of May's retail sales, it seems increasingly likely that any downturn in car buying will be the biggest difference between continued growth and a fall into recession (or at least into very weak growth). The Commerce Department's month-over-month figures show a decline in retail sales at electronics stores, grocery stores, health and personal care stores (primarily pharmacies), apparel retailers, "specialty" retail (sporting goods, books, hobbies, and music), department stores, and bars and restaurants. Year-over-year growth rates are more important to assessing the health of the retail environment (at least in this writer's view), and on this measure only specialty retail and department stores suffered declining sales.

The only segment other than auto dealers to post a month-over-month growth rate in excess of 1% was building-and-garden-supply retailers, which is most prominently represented by home-improvement chain and Dow component Home Depot (NYSE:HD). Even this positive bit of sector news wasn't enough to boost Home Depot, which lost 1.7% of its value today. Home-improvement retail grew 4.6% on a year-over-year basis, which seems like a good clip until you realize that it's well below last summer's heady growth rates. There is still time for this sector to rebound and recapture those growth rates, though:

Retailhomeimproveapr
Source: U.S. Department of Commerce.

The gas-station component of noncore retail, which was once one of post-crash retail's fastest-growing sectors, has since slipped into persistent declines, posting year-over-year growth in excess of 1% on a nominal basis in only two of the past 12 months. Since retail sales reports don't account for inflation, this means that retail-level gas sales have essentially been in decline for a year. This doesn't jibe very well with auto sales, which have posted year-over-year growth rates of 5% or greater in all but one of the past 12 months and have grown 10% or more year over year for eight of the past 12 months:

Retailautosgasmay
Source: U.S. Department of Commerce.

While we're on the subject of inflation, let's look at how overall retail sales have grown once inflation is taken into account. To smooth out the month-to-month noise, we'll use a rolling three-month average year-over-year growth rate -- that is, we'll compare the average of retail sales from this March, April, and May to the average of sales from those three months in 2013:

Retailnomreal
Source: U.S. Department of Commerce and St. Louis Fed.
Inflation data: Purchasing power of the consumer dollar.
Indexed at 100 to January 1992 (start of retail sales data availability).
latest month estimated based on earlier data.

America's retailers are still growing their sales on an inflation-adjusted basis, but the picture isn't quite as rosy as it looks in the headline numbers -- and even those numbers have been underwhelming lately. Retail comprises about 30% of U.S. gross domestic product, based on the government's figures for both indicators; since GDP growth is assessed on an inflation-adjusted basis, it's important to check retail sales growth in the same way, as a sustained plunge in retail sales might point to economic weakness in the months ahead. Here's how retail sales growth looks on a quarterly basis, compared to GDP growth, when we annualize (add up the past 12 months of sales) and adjust for inflation:

Retailsalesgdpmay
Source: U.S. Department of Commerce U.S. Bureau of Economic Analysis.
Inflation adjustments for retail sales: Purchasing power of the consumer dollar.
Indexed at 100 to Jan. 1992 (start of retail sales data availability), via St. Louis Fed.

As you can see, GDP usually leads retail sales by a quarter or two, and since retail sales figures are updated on a monthly basis as compared to the quarterly updates to GDP, we might be get some insight into the American economy between GDP updates by examining real annualized retail sales growth. On this measure, at least, it appears the economy isn't about to stall out just yet:

Retailannualizedgrowthmay
Source: U.S. Department of Commerce.

The most important retail data point to watch going forward will undoubtedly be auto sales, which comprises about 19% of all retail sales and which has been nearly the only retail segment (save e-commerce) to post sustained double-digit growth in recent years. While autos' share of the retail pie has grown quite a bit since bottoming out at just 14% of all retail sales in late 2009, it's still far from its late dot-com-era share of roughly 23%. Making up the difference would add a potential $240 billion in auto sales to the American economy this year, and that doesn't count the secondary impact of all those extra cars on the road.

Warren Buffett's worst auto-nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends Chevron and Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers