Retail Sales Up?

For the first time in seven months, retail sales, from December to January, increased by 1% (See Full Story). This was also the biggest jump in monthly sales numbers in the last 14 months.

Before too many people get all excited and think that this means that we are on the brink of coming out of our economic doldrums, it is important to understand what that number is really saying and to also put it into a broader context of another number: Consumer Credit.

First, the retail sales number is a comparison of gross dollar volumes from a month prior. It is not some kind of units sold number. Nor, is it a measure of how much money you or I are spending each month.

We already knew from last week's consumer credit number (as released by the Federal Reserve), that people aren't swiping their credit cards and buying all kinds of new stuff (See Full Story). So, to have a retail sales number that has increased may only mean that the retailers have finally found pricing and inventories levels that match their current level of sales activity; and, they are no longer deeply slashing prices to get the product off their shelves. Simply speaking, prices are stabilizing to meet the reduced purchasing activity of this depressed economy.

We have already seen this in gasoline prices. Despite the slipping demand, gasoline prices are rising again. That's because the retailers and the refiners have found some equilibrium in the supply and the delivery of their product. At the local gas station, inventory levels have bottomed out to a point where they can properly estimate and meter the amount of gasoline deliveries they need to match the reduced sales activity. Similarly, the refineries are now in a position to accurately measure demand and they are shutting down portions of their refining operations so that they don't overproduce and lose money. The fact that prices are rising just means that refiners and the local gasoline outlets have somewhat overshot this adjustment. Without any further increases in demand, prices should fall again as this process of fine tuning deliveries and inventory levels continues to properly match the level of sales. However, you shouldn't expect any big drop in gasoline prices. The adjustment of pricing will probably only be in the magnitude of 2 or 3 percent; or, a few pennies. Further, we are approaching the summer driving season and demand (and prices) are sure to go up.

All this is "not" to say that Retail Sales isn't a good measure of our economy. But it is just one number out of many measurements that should be taken into consideration. Everything has to be put into context. I would say that, if we see consumer credit starting to expand, a rise in retail sales could be a significant indicator that our economy is improving. But, to me, one without the other is just a hollow and false indication.