Retail Sales: “Decent but Unexceptional”

"The retail sector is enjoying a decent but unexceptional holiday shopping season."
~Professor Peter Morici, University of Maryland Business School


We concur. As noted previously, gasoline prices are back to pre-Katrina levels, putting more jingle in consumers pockets. That turns into cash to spend at the mall — or as was more likely the case, the
big box discounters.

We do see lots of evidence that reflect concern over personal finances in general, especially fuel prices, particularly if the Winter gets as cold as some forecaster expect (Its bitterly cold in NYC).  Retailers who discounted heavily got the traffic; Retail shareholders may be in for an unpleasant surprise next earnings report, as margins were likely to be squeezed.   

The spin was that the huge drop in gasoline sales (-5.9%) were price (and not volume) related. Also part of the monthly gains: re-incentivized automobiles (autos and parts dealers +2.6%). Excluding autos, retail sales would have been down 0.3 percent, the biggest drop in 19 months. GM and Ford are now discounters, along with Target and Wal-Mart. If GM doesn’t have "always low prices" they cannot move enough cars off the lot. Good luck putting the employee pricing toothpaste back in the tube.

On to the data: The November Retail Sales data
were slightly below expectations on a month-to-month basis;
Year-over-year, they were up a respectable 7.6%. These numbers are very
consistent with our expectations for a 3-4% gains for the holiday season.

Have a look at these 3 charts (click for larger graphs) to get a sense of where spending may go:

The post-Katrina Gas Spike has gone away:


But prices have begun rising again:


Meanwhile, Retail Sales are still trending higher:


The WSJ noted:

The nation’s retail sales showed solid gains last month,
suggesting that consumer spending this holiday season remains on an
upward path despite higher-than-normal energy costs. November sales hit
a seasonally adjusted $353.9 billion, up 0.3% from October and 6.3%
from a year earlier, the Commerce Department said.

Discretionary spending is the money people devote to things that
aren’t necessities, such as entertainment, hobbies and restaurant
meals. In November, such spending was up 6.9% from a year earlier and
it has risen by more than 6% every month since August. Restaurants were
among the biggest beneficiaries of the trend last
month, with their sales increasing 0.9% from the previous month and
8.2% from a year earlier.


Gas Prices

Gains in Holiday Spending
THE WALL STREET JOURNAL, December 14, 2005; Page A2

Retail sales rise 0.3% in November
Rex Nutting
MarketWatch, 9:14 AM ET Dec. 13, 2005

Category: Retail

Economists React to Fed


The Federal Reserve, as expected raised interest rates for the
13th consecutive time Tuesday, lifting the federal-funds rate by a quarter
percentage point to 4.25%. The central bank suggested it would raise rates
again, but also hinted that it is less certain on its future rate actions than
it has been in over a year. In the accompanying statement, the Fed said growth
remained "solid", inflation excluding food and energy prices had "stayed
relatively low," and inflation expectations were contained. But it also warned
that the possibility of further erosion of spare productive capacity and high
energy prices "have the potential to add to inflation pressures."

What do
economists and other analysts make of the changes? Here’s a sample of their

* * *

The Fed has finally taken the step that we have been
pointing to for a while, in separating the two concepts of reaching neutrality
and finishing the rate cycle. They kept "measured," as we thought they might,
but now it refers to "some further measured policy firming" as opposed to
removing accommodation at a measured rate. So, rather than being on automatic
pilot in raising rates toward neutral, the FOMC now sees itself in the second
stage of the rate hike cycle — further moves will be perceived by Fed officials
as taking policy toward a restrictive stance.

– Stephen Stanley, RBS
Greenwich Capital

* * *

The message from the FOMC appears to be that barring a
major change in the tone of economic data, another 25bp tightening move will be
implemented at Chairman Greenspan’s last meeting on January 31. At that time, it
is quite possible that the "measured phrase" will be jettisoned, leaving
incoming Chairman Ben Bernanke with a clean slate for the next meeting on March
28. Our own view remains that the evidence concerning economic growth should be
sufficiently strong in coming months to spur another three 25bp tightening
moves, lifting the Fed funds target to 5.00% in the second quarter of the year.
We think that growth will then be moderating sufficiently for the FOMC to cease
tightening, even if core inflation drifts up mildly from its current

– Joshua Shapiro, Maria Fiorini Ramirez Inc.

* * *

The Fed announced: "Core inflation has stayed relatively
low in recent months and longer-term inflation expectations remain contained."
Quite frankly, we do not believe them. We know that beyond the rises in food and
energy prices, nearly everything — from healthcare to building materials to
education costs to insurance to commodities — costs more. And gold, the world’s
best inflation indicator, is well over $500 per ounce. Where ever we look, we
see evidence that prices have limited stability and an upward bias.

Barry Ritholtz, Maxim Group

* * *


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