May 22, 2023
Slipping Sales - Flexport Weekly Economic Report
Adjusting for inflation can be enough to flip a positive retail sales experience to negative – and was in the February-April quarter. Even after smoothing and deflating, the latest numbers show wild variation across retail sectors in recent months.
In Focus - Retail Reconsidered
On its face, the April U.S. Advance Retail Sales report was rather cheery. After total retail and food service sales were down in February and March, they rose 0.4% in April. That held true whether one excluded autos or only considered general merchandise.
A simple, happy story.
But for three reasons the retail sales report may be the most difficult of the major economic releases to interpret: there’s a lot of noise from month to month; the numbers are not adjusted for inflation; and there is substantial variation across sub-categories. To figure out what’s really happening with retail sales, we take each of these in turn.
To remove the month to month noise, we use rolling three-month sums, the most recent being February-April 2023. We then compare this grouping of months both to the three months preceding (November-January, with seasonally-adjusted numbers) and to the three months a year earlier (February-April 2022). In the chart, we describe the first comparison as “quarterly” and the second as “annual.” This should smooth month to month volatility.
Importantly, the quarterly figures are not annualized. Thus, if one looks at the Health & Personal Care Stores category, it may appear that 2.7% quarterly growth is a slowdown from 6.5% annual growth. It isn’t. The quarterly number equates to an 11.4% annualized growth rate.
Next, inflation. When economists list the harms of inflation, one is that it obscures economic signals. That has certainly been true recently. For the retail sales categories under discussion, we turn to the part of CPI that describes “commodities less food and energy commodities” and create custom deflators for the relevant comparisons. As it turns out, this shows 1.2% quarterly inflation and 1.5% annual inflation.
While that may not seem like a lot of inflation – it is notably lower than what one would see with core or headline CPI – it is high enough to flip the figure for total retail quarterly performance from 0.6% nominal to -0.7% real, or from modest expansion to modest contraction.
There is no magic fix for the last challenge – the sharp differences in performance between different retail sales sectors. While some broad categories were mostly unchanged for the quarterly comparison – total retail down a bit, department stores flat, and non-store retail up 1.0% – there were some dramatic differences in more specific categories.
The biggest winners were electronics and appliance stores, up 5.8% for the quarterly comparison (annualized 25.3%) and health and personal care stores, up 2.7% (annualized 11.4%). The biggest losing sectors were furniture and home furnishing stores, down 3.8% in the quarterly comparison (annualized -14.3%) and sporting goods, hobby, musical instrument, & book stores down 3.5% (annualized -13.2%).
Nor is there even consistency of results within categories. For sporting goods and clothing, the negative recent quarter was enough to pull down what had otherwise been a positive year. The strength in electronics and appliances in the quarter just finished was a notable reversal from the three quarters before.
Thus, we’re left with our most reliable read on retail sales coming from the adjusted total retail numbers, which show a quarterly contraction, but level performance over the last year. And we’re left with an awareness that any given business’ experience may vary substantially from that tranquil story.
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Euro area GDP expanded only 0.1% quarter-on-quarter in the first three months of the year and slowed to 1.3% growth year-on-year after increasing 1.8% in Q4 2022 by the same measure. Spain and Portugal registered the strongest year-on-year expansions, rising by 3.8% and 2.5%, respectively, while the German economy contracted by 0.1%.
Headline inflation in the Euro area in April ticked up by 0.1% over the previous month to reach 7.0%. However, core inflation, which excludes energy, food, alcohol and tobacco, fell by 0.1% to 5.6%. Services prices, now receiving more attention from central bankers, rose by 0.1% from March to 5.2%.
Japan’s GDP grew at an annualized rate of 1.6% in the first quarter after having contracted the two previous quarters. Consumer spending and business investment increased by 0.6% and 0.9%, but exports declined by 4.2% after six consecutive quarters of growth (see below for detail).
Headline inflation in Japan was 3.5% in April, up from the 3.2% reading in March. The core-core inflation measure, which strips out fresh food and fuel, was up 4.1% year-on-year, the fastest annualized rise since 1981. Until the last 6-8 months, Japan had been struggling with deflation for more than two decades.
Industrial production in key economies rose in the latest round of estimates, save for in the Euro area, where production declined in March. The U.S., China and Japan all reported expansions in motor vehicles.
U.S. industrial production was up 0.5% in April after registering no increases in March and February, with manufacturing rising 1.0% month-on-month, led by greater output of motor vehicles and parts. Overall capacity utilization improved to 79.7%, in-line with the long-run average.
Euro area industrial production for March fell 4.1% month-on-month and 1.4% year-on-year. Production of non-durable goods was 6.8% above 2022, but production across the other sectors contracted; intermediate goods were down 4.7% and durable goods by 0.8%.
Industrial production in China climbed 5.6% year-on-year in April, but was down 0.5% month-on-month. Overall manufacturing expanded 6.5%, with equipment manufacturing up 13.2%. Output of ‘new-energy vehicles’ was 85.4% greater than April 2022, although that figure is likely inflated due to lockdown measures that hampered production last year.
Industrial production in Japan increased by 1.1% in March from February, but was 0.6% lower than March 2022. Motor vehicle production was up 5.2% on a seasonally-adjusted basis after rising by 15.4% by the same measure a month earlier.
The main trade data releases last week were largely positive, except for Singapore’s re-exports, which through the first four months of the year are down considerably.
Euro area goods exports were €269.2 billion in March, growth of 7.5% year-on-year; goods exports were up 8.5% in the first quarter compared to Q1 2022. Imports fell 10.0% in March for a quarterly total of €727.1 billion, which was essentially flat year-on-year. Overall trade (both exports + imports) with the U.S. continues to expand, with exports increasing 5.9% and imports by 15.1%. Imports from China were down 10.6%.
Japan’s goods exports in April grew for the 26th-straight month, expanding by 2.6% over April 2022. Exports to China, Japan’s second largest market, were down by 2.9% but that was offset by gains elsewhere, including to the U.S., its largest, where exports were up 10.5%. By product categories, motor vehicle exports increased 3.8%, while semiconductors declined 6.5%.
Singapore’s non-oil re-exports declined 20.6% in April, following a 6.1% decrease in March. Re-exports of electronic goods and parts were down 27.2% year–on-year and non-electronic goods by 9.2%. Singapore is a key transshipment hub for inter-Asia and intra-ASEAN trade of intermediate and finished goods.
Negotiations between the White House and House Republicans over raising the U.S. debt ceiling stalled last Friday, with no progress announced over the weekend. President Biden cut short his time at the G7 Summit and other planned trips, arriving back in DC Sunday. The two sides have agreed to resume talks on Monday. Treasury Secretary Yellen has said that a failure to raise the limit could result in the government becoming unable to meet obligations as early as June 1st.
Chairman Powell remarked at a Fed research conference last Friday that developments in the banking sector are ‘contributing to tighter credit conditions’ and that the policy rate ‘may not need to rise as much as it would have otherwise to achieve our goals.’ Those goals, under the Dual Mandate, are to promote maximum employment, stable prices and moderate long-term interest rates. The next meeting of the Federal Open Market Committee is scheduled for June 13-14.
The Leader’s Comminique from the G7 Summit held in Hiroshima last week devoted an unusual amount of space to China. On economic issues, the G7 leaders claimed not to seek ‘decoupling’ from China but ‘de-risking and diversifying’ for the sake of ‘resiliency’ and ‘to reduce excessive dependencies in our critical supply chains.’ A spokesperson for China’s Ministry of Foreign Affairs issued a response critical of the G7 and the U.S., more specifically, for ‘weapon[izing] economic and trade relations.’
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