Friday, October 30, 2015

What’s Dragging Down Core Retail Sales?

One of the biggest questions in corporate earnings is how the US consumers are doing. We know housing continues to recover, if in a sluggish fashion. We know auto sales are doing well, driven by light trucks. How about retail sales? 

Headline retail sales have continued to increase but showing signs of deceleration. This number is heavily influenced by auto & auto parts though –which we already know is strong. On the other hand, gasoline prices have dropped significantly and that drags down the headline numbers even though it should benefit consumers.

So I consider “core” retail sales – excluding auto and gasoline sales – as a more accurate reading for U.S consumers. The growth in this number is shown below.

Notice that post 2008, growth in “core” retail sales have hovered around 3-5%, slower than the 5-7% range pre-crisis. So I dug a little deeper to see which sector is dragging this down.

The Census Bureau report divides retail sales into 13 categories - motor vehicles, furniture, gasoline, building materials, and so on. Going through the data, I found the biggest drags come from 2 sectors: general merchandise stores and building materials.

The contributions of these 2 sectors to core retail sales growth are shown below.

The declining growth in general merchandise stores might have something to do with offsetting growth in online shopping (although apparently not enough to offset overall sales since the headline number does include e-commerce.) .

The other major drag on growth is the “building materials & garden equipment & supplies dealers” category. Growth has recovered but has not yet reached pre-crisis levels. The good news here is that new home sales – as shown by the link in the first paragraph – should have plenty of room to grow.

Looking out the next few years, I can see a housing pick up driving core retail sales up toward pre-crisis levels. Gasoline prices will also stabilize and be less of a drag on headline growth.

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