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Autos Are Denting Retail Sales

By Michael Englund The October retail sales report released on Nov. 12 revealed a surprisingly solid 0.9% gain (excluding autos). But overall sales grew just 0.2% -- in line with expectations -- and reflected weakness in the auto sector. Numbers for the prior two months were revised upwards in the ex-auto data, with a gain in September of 0.8%, vs. the 0.6% originally reported, and a gain in August of 0.3%, vs. 0.2% in the initial report. However, auto figures were revised downward in both months, so the overall headline retail sales figures of -0.3% in August and 1.6% in September reflected little net change from the prior report.

Strength in October was led by gasoline service stations, which were up 4.3% (thanks mostly to higher prices, not more fuel pumped), and clothing, which rose 3%. The big drag came from autos, which fell 2.2%. Interestingly, spending on building materials dropped 1.1%, though the extensive rebuilding activity in Florida following the hurricanes may have introduced upside possibility for this component.

COMPOSITION SHIFT. The retail data suggest upward revisions to third-quarter consumption and a slightly better outlook for the fourth quarter, though the gasoline service-station figures will drive the so-called chain price deflators (used to adjust GDP data for inflation) rather than real growth. We're assuming an upward adjustment for third-quarter consumption of around $2.5 billion. We would normally have assumed a bump of as much as $5 billion, but in this case we suspect that the auto figures in another data set covering retail sales, called personal consumption expenditures, overstated growth and are poised for downward revision, given today's retail auto data.

We don't expect a net revision in the third-quarter gross domestic product growth rate of 3.7%, despite the consumption adjustment due to expected weakness in inventories, though the shift in the composition of growth in the quarter from inventories to sales is good news for the overall growth outlook.

For the fourth quarter, we now expect a solid 3.3% real growth rate for consumption, and we continue to expect a solid 4.5% real GDP increase.

NO EFFECT. As for the hurricanes' impact, historically they've had little effect on overall retail sales growth both during and after a hurricane, despite plausible reasons to expect a significant disruption to spending, followed by a boost.

And alas, this remained the case this season. Not even the building-materials figures posted what could be called "intuitive swings." In the most recent report, this category of spending rose 1.1% during the month of hurricane strikes, when one might have expected disruptions, and it fell 1.1% the following month, when rebuilding activity accelerated. Englund is chief economist for Action Economics

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