US Retail Sales: Uncle Sam on the Rise?

First of all, let me give you a brief explanation of what the retail sales report is. Basically, it measures the amount that Americans spend on consumer goods like iPads, Kobe7s, Marc Jacobs bags, etc. It represents about one third of total consumer spending, so it’s a statistic that we should always keep an eye on.

Which brings us back to last Thursday.

Lost amongst all the hoopla surrounding the ECB and BOE‘s interest rate decision was the release of retail sales figures for December. Headline reports showed that monthly retail sales growth came in worse-than-expected, printing a mere 0.1% uptick from November’s figures, after it was expected to rise by 0.3%.

Even worse were core retail sales, as they pulled off a Lebron-in-the-4th quarter moment, choking to a negative 0.2% drop last December.

Initially, this was taking negatively by the markets, as some saw it as a sign that consumer spending remain subdued despite the price slashing and sales promotions that many retailers implemented over the holidays. If Christmas isn’t reason enough to go shopping, then what is?

Still, we can’t look at one month’s worth of data and make assumptions. We gotta look at the overall trend and quite frankly, retail sales actually grew quite a bit in 2011. Looking at the data, we can see that retail sales grew by 7.7% in 2011, the best growth rate in 11 years. This follows the 6.5% rise we saw in 2010.

I decided to dig a little deeper and see just how predictive retail sales growth is of the overall U.S. economy.

I got hard retail sales and gross domestic product (GDP) figures from the U.S. Census Bureau and the Bureau of Economic Analysis (don’t worry, I think it’s pretty safe to trust these fellas) over the past four years and the results were somewhat surprising. Here’s a graph of the data that I collected:

Retail Sales Vs. GDP 2007-2011

Back in 2007, retail sales were staying comfortably above $3 trillion, with GDP also above $13 trillion. However, once the financial crisis hit in 2008, we saw retail sales drop to around the $2.9 trillion area. Soon after, GDP experienced a similar drop, falling to as low as $12.7 trillion by mid-2009.

Luckily, Uncle Sam’s recovered a bit over the past couple of years, probably helped by the revival in retail sales growth.

Now, before you bust out the champagne and celebrate the “return” of the glory years, keep in mind that one major limitation of using retail sales as a gauge of economic performance is that it represents just one third of total GDP. The remaining two-thirds are driven by services industries, which still represent the backbone of the American economy.

Aside from that, we also have to take into account the current labor market situation and market sentiment. Despite last month’s rosy NFP figures, the labor market is far from where it needs to be in order for the economy to sustain healthy growth. Furthermore, if sentiment takes a turn for the worse, it could send the economy into another rut, as everyone would shift back into austerity mode.

For now, we’ll have to wait and see how the economy performs over the next few months. If the economy shows more signs of life, we can probably expect the Fed to back off on any additional quantitative easing measures. On the flip side, if the outlook darkens, be ready for a rocky end to 2012.