The Economy: The Consumer Hangs In

A better-than-expected rise in January retail sales helps ease recessionary fears somewhat. Business inventories correct an overshoot

A Feb. 13 report showing a slightly better-than-expected bounce in retail sales in January dealt a blow to the more pessimistic market outlooks for the U.S. consumer sector. But downward revisions to previous months lowered the trajectory of sales growth, and prompted modest downward revisions in Action Economics' fourth- and first-quarter gross domestic product estimates.

Yet retail inventory figures in the December business inventories report, also released Feb. 13, were slightly stronger than expected, and limit the downside revision risk to fourth-quarter GDP.

The retail sales revisions, along with the business inventory data, imply fourth-quarter GDP is tracking a 0.5% growth clip, which is only slightly below the 0.6% figure in the advance report.

We also revised down our first-quarter GDP estimate to 0.8%, from 1.0%, in response to a weaker trajectory for excluding-autos durable sales as we entered the current quarter, and we now peg first-quarter real (adjusted for inflation) consumption growth at 1.0%. We continue to assume a monthly gain in consumption of 0.1% in January, as the various sales swings on the month were largely as expected.

Here is our rundown of the reports released Feb. 13:

Retail Sales

Retail sales rose 0.3% in January, both overall and excluding autos. December's 0.4% decline was not revised, though the ex-auto component was bumped up to –0.3%, from –0.4% previously, and the November gains were revised lower. On a year-over-year basis, sales were up 4.6%, vs. a 3.2% clip in December, while the ex-auto index was up 5.7%, vs. 3.9% previously. The component data were mixed, with many of the housing-related items lower, as were sporting goods sales and department store sales. Gasoline station sales climbed 2.0%, with clothing up too, along with motor vehicle and parts sales.

Despite the back-revisions, it remains the case that, in the fourth quarter, the consumer actually outspent what most economists had initially anticipated, as the gasoline price surge during the quarter was accompanied by surprisingly little pullback in expenditure on other goods in October and November. Sales in December and January have now given back the prior overperformance.

The mix has left a bounce in the savings rate back to the same 0.5% area seen in three of the four months ending October before its temporary drop in November to zero. The trend in the savings rate through January is now back to exactly sideways, which means there has been no net pullback in consumer spending at all since the emergence of market turmoil in August—despite the market's focus on confirming this scenario with every economic report. Consumer spending has slowed proportionally to income, and is hence not a driver of the slowdown in GDP—at least not yet.

Business Inventories

The U.S. business inventory report revealed a stronger-than-expected 0.6% December gain. Retail inventories posted a smaller-than-expected 0.1% December drop, even though auto inventories posted the largely expected big 1.6% decline.

Business sales in the report posted the 0.5% December drop that was previously revealed with the retail sales revisions. The decline reversed some of the surprising sales overshoot over the prior three months, where we saw monthly gains of 1.4% in November, 0.9% in October, and 0.7% in September. As with retail sales, some might extrapolate fears about the spending trajectory from the December business sales drop. Yet these figures, and the lean sales data we expect for January at the factory and wholesale levels of production, mostly reflect a correction to the price-boosted sales overshoot of the early fourth quarter.

The inventory-to-sales (I/S) bounce to a still low 1.26 in December leaves us just above the record low of 1.25 in November, leaving little room for further inventory subtractions from GDP in the first quarter. Our current 0.8% first-quarter GDP estimate assumes a small $7 billion inventory contribution, though with a bounce in inventories that may be back-loaded in the quarter.

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