Strong Retail Sales Increase Odds of Strong Third Quarter GDP

09/12/2014 4:42 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Good retail sales growth for July and August is a positive sign for third quarter GDP growth, and even for a nitpicker like MoneyShow’s Jim Jubak, it’s hard to find much to fault in today’s positive report.

Retail sales in August climbed by 0.6% in August, the Commerce Department reported this morning. The department also revised July data to show a 0.3% increase, up from an initial 0%. The August rate is the fastest pace in four months.

But US stocks are down today. Modestly, but still down. With the Standard & Poor’s 500 down 0.6% as of the close in New York.

The consensus today among analysts and pundits seems to be that the drop is a reaction to the good retail sales numbers. The logic? That a stronger US economy increases the odds that the Federal Reserve will start to raise interest rates sooner rather than later.

But the drop is so modest and is so much at piece with the trend—since the S&P 500 first breached 2,000 back on August 25—that I’d suggest another interpretation deserves consideration. What we’ve seen over the last two weeks is just the normal testing and hesitancy that accompanies a move up to a major psychological threshold such as 2,000. In other words…nothing to see here. Just move along. Especially when you consider how much unsettling geopolitical news the market seems willing to shrug off right now, I’d say there’s a good argument that the trend over the longer-term—you know long-term, like 3 months—is still to the upside.

Even if you’re a nitpicker, which I am, it’s hard to find much to fault in today’s positive report.

Yes, sales of cars and car parts were stronger than the overall retail sales number—sales in the auto sector grew by 1.5%—and there’s considerable worry that growth in auto sales has been pumped up by an unsustainable increase in credit extended to borrowers, especially less-credit worthy borrowers. But even excluding auto sales, retail sales increased by 0.3% for August. That’s inline with the July revision to 0.3% and represents a decent growth rate. Core sales, which exclude autos, building materials, and gasoline, rose by 0.4%.

The good numbers included most sectors of the economy with only two sectors showing a decline: gasoline stations saw sales drop by 0.8% on lower gas prices and sales at general merchandise stores dropped 0.1%, at least, partially on a long-term downward trend in sales in that category. (But if you’re looking for a problem for the economy, the weakness in this category points to it: consumer incomes aren’t exactly racing ahead and that leaves consumption growth dependent to a disconcerting degree on increases in consumer credit.)

The good retail sales growth for July and August are positive signs for third quarter GDP growth. The Bureau of Economic Analysis is scheduled to produce its first estimate for third quarter GDP on October 30. Before that, on September 26, the BEA will report another set of revisions for second quarter GDP growth. The last revision on August 28 saw GDP growth move upward from 4% to 4.2% for the second quarter.

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