“There are lies, damn lies, and statistics” goes a saying popularized by Mark Twain which describes the persuasive power of numbers, particularly the use of statistics to bolster weak arguments.
At dinner a couple of weeks ago with business colleagues and later repeated by another business acquaintance, comments were made about how poorly the retail sector was doing and that we should worry that holiday sales would be weak with implications for the overall economy. For my regular readers, you can imagine my shock! They must have been listening to the business media pundits who love leading with negativity. Such negativity was likely due to the poor Q3 results of some of the traditional consumer discretionary stocks, like the department stores (Macy’s, Nordstrom, Dillard’s) which generally missed their expected Q3 sales and revenue numbers. The media’s immediate speculation was that soft retail sales were in store for the holiday season.
Let’s dig a little deeper, ask the appropriate questions, and more deeply analyze consumer trends:
- Auto sales: Except for some special government programs, like “cash for clunkers” in ’09, the normal market has rarely seen monthly auto sales top the 17 million unit annual rate. It happened twice in ’06. The next time it happened was in’14 (also 2 months). But, this year we have seen that 17 million annual rate for 7 months in a row (April-October) with both September and October topping 18 million units. It would be pretty unusual for such auto sales to be done in a vacuum. There has never been a time when the consumer was increasing spending on autos that wasn’t also accompanied by increased consumption in general. Like almost everything else in economics, this time is not different.
- Measuring retail: The traditional reporting of “retail sales” activity is a measurement that only accounts for about 40 percent of consumer retail spending. The other 60 percent, services, are not included. There is a great deal of discussion in the blogs and on social media about the differences in economic behavior between the generations. Most of the conclusions are that millennials and younger generations are more likely to seek out “experiences” (as opposed to stuff) than are the older generations. And this may, at least partially, explain why the more traditional measures of “consumption” (i.e., “retail” sales) appear to be lagging. When such “experience” items are examined, lo and behold, we find a booming travel and leisure industry, as well as significantly rising revenues in the restaurant space. For example, American Airlines reported in mid-November that its passenger load factor was a record 85.2 percent in October, up from 82.2 percent a year earlier. And according to REIT magazine, hotel occupancy rates will be at 30-year highs in 2016.
After punishing consumer discretionary stocks in early November, the equity markets woke up the week of Nov. 16 and have been on a tear ever since, when specialty retailers Nike, Abercrobie, Under Armour, and Foot Locker reported higher than expect Q3 results indicating that the younger crowd still shops, just more at the specialty stores than at the traditional department stores.
With U.S. households awash in liquidity (wages are rising – 3.5 percent in Q3 according to ADP), auto sales at record levels, gasoline prices low and likely falling, household mortgage and credit card debt rising (at an annual rate of 7.2 percent in Q3), and consumer confidence rising, it would be out of character for the U.S. consumer to not be spending on retail. What makes more sense is that buying patterns are changing as the millennials have come of age and obtained employment after the recession, but the measurement tools have not kept pace.
And this isn’t the first time in recent memory that measurement issues have arisen in data reporting. Late last spring, three San Francisco Fed economists (Rudebusch, Wilson, Mahedy, “The Puzzle of Weak First-Quarter GDP Growth”) criticized the Bureau of Economic Analysis’s (BEA) calculation of GDP, indicating that BEA’s methodology produced consistently downwardly biased results for first quarter GDP for the past few years. In addition, some very reputable economists have also criticized the Bureau of Labor Statistics’ (BLS) use of “concurrent seasonal adjustment” (recalculating all of the seasonal factors every month), which, they say, causes unnecessary variability in the employment data. Note that in September, BLS calculated net new job creation at a relative paltry 137,000, while October’s number jumped to an overheated 271,000. Meanwhile, private sector ADP reported a more consistent job creation of 200,000 and 182,000 respectively for those two months.
“Lies, damn lies, and statistics.” Unless you look deeper than just one data point and/or believe everything you hear in the business media, you are likely to be misled. Stagnating retail sales are just not consistent with everything else going on economically in America today. It is most likely a measurement issue. That said, all of the underlying evidence points to a 2015 holiday shopping season that may very well be record setting.
Robert Barone (Ph.D., Economics, Georgetown University), an adviser representative of Concert Wealth Management, Inc., is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, Inc., a Registered Investment Advisor. Dr. Barone is available to discuss client investment needs. All accounts welcomed. Call him at (775) 284-7778.
Statistics and other information have been compiled from various sources that Universal Value Advisors believes to be accurate and credible but makes no guarantee to their complete accuracy. A more detailed description of Concert Wealth Management, Inc., its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.