Retail Sales too Good to be True

Dan North | February 2023

Retail sales rose at a huge 3.0% m/m rate, far exceeding expectations of 1.9%. The y/y rate hit 6.4%, however, that was below the average of 8.0% over the past six months. Retail sales ex-auto rose 2.3% m/m, sales ex-autos and gasoline rose 2.6%, and the “control” group which strips out several volatile components rose 1.7%. Those are strong numbers and are all substantially above expectations. Sales in almost every major category rose. However, gasoline sales were flat despite prices rising 2.2% in January compared to December.

There’s a problem with the data here, I believe. A substantial amount of the headline gain was driven by a 7.2% leap in restaurant and bar sales which was far, far above the pre-pandemic record of 4.5%, and far, far above the pre-pandemic average of 0.4%. Without the 7.2% m/m gain in restaurants and bars, overall sales would have been 2.3%, not 3.0%. And that 7.2% came after 0% in December ’22 and -0.2% in November ’22.

Similarly, on a y/y basis restaurant and bar sales were up 25.2% more than twice the pre-pandemic record of 10.8%, and a massive increase above last month’s 13.5%. Without restaurant and bar sales, overall sales would have been 3.9% y/y instead of 6.4%.
That’s a lot of numbers, so I’ve summarized them in the table below. Something is just not right here. I’m highly skeptical of these numbers just as well as the unbelievable 517k job gains in January. It’s all too good to be true. Some explanations may be due to changes to the Bureau of Economic Analysis (BEA) adjustments “for seasonal variation and holiday and trading-day differences.” Another possibility is that about 70 million people received an 8.7% Cost of Living Adjustment (COLA) boost to Social Security checks beginning in January, a 41-year high. That may have helped juice the headline number. A further possibility is that credit card spending is on the rise. And perhaps some retailers are still blowing out inventory. I actually have a call into the BEA to see if they can shed any more light.
Getting back to the rest of the report, retail sales are reported on a dollar, or nominal basis, not adjusted for inflation. After stripping out inflation real retail sales on a y/y basis were 0.0%.
Unlike the consumer side of the economy, the industrial side put in a limp performance in January. Overall industrial production was flat for the month, while the y/y rate landed at 0.8%, the lowest of the post-pandemic era. The manufacturing segment of industrial production gained 1.0% m/m, putting the y/y rate at 0.3%, after the previous month’s post-pandemic low of -1.0% - the long-term average is 3.1%. After stripping out auto production, manufacturing fell -0.1% y/y, the second straight decline after last month’s -1.4%. The long-term average is 2.2%. The manufacturing sector is in recession.

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