Despite the positive spin on the most recent retail sales report, it indicated continued economic weakness, claims Landon Whaley.
Headline risks are everywhere, much like the “this is our year” feeling fans experience when it's draft night. There is never a shortage of “Headline Risk” candidates as the media, and the Old Institution remain hell-bent on misinforming the masses. This week’s “Headline Risk” comes courtesy of the Old Institution and their outdated and dogmatic way of evaluating economic data.
Last week, Reuters told us, “Strong U.S. retail sales improve economy’s fortune.” CNBC confirmed that retail sales increased in May but also pointed out that April’s retail sales data was revised higher. And my favorite, the Financial Times assures us that “Strong economic data eases fears of U.S. slowdown” as “retail sales rose for a second straight month in May.”
I couldn’t make this up if I tried. The media’s coverage of the May retail sales report is based on the highly noisy and uninformative monthly growth rate. Contrary to what these headlines indicated, sales did not increase for the second straight month, the revision to April’s data doesn’t change a thing, and there were zero improvements in the outlook for the U.S. economy.
If you’ve been with us for any reasonable stretch of time, you know that one of the ways we can make macro calls and position correctly before markets move is by evaluating economic data in year-over-year terms. To us, it’s highly intuitive to watch the slope (rate of change) of annual data because this provides a clear signal for the data set in question, and it avoids the noise that necessarily plagues the growth rate from one month to the next. Yet what is intuitive to us eludes the Old Institution.
While the business media are navel-gazing monthly growth rates that are jumping all over the place like a toddler on a sugar high, the annual growth rate of retail sales has been painting a very clear picture since peaking July 2018. Headline retail sales growth has slowed in seven of the last ten months, hit a recessionary growth level in December and, after a slight bounce to start the year, has now slowed for two consecutive months.
A quick perusal of the Old Institution’s coverage shows another glaring omission. These cats never, ever discuss the retail sales control group. Why does this matter, you may ask? The control group’s annual growth rate is the most critical aspect of any U.S. retail sales report because it’s used in the actual calculation of U.S. GDP. Despite the high information ratio embedded in the control group’s growth, the business media routinely ignores it. Luckily for you, we don’t and can report that the control group’s growth rate slowed to +3.4% in May, marking the seventh month of slowing sales growth since peaking at +5.5% in July 2018.
If you wait for the Old Institution to clue you into economic developments, you’ve lost the investing game before it’s even begun. The way they evaluate data has them consistently missing critical economic shifts until months after the fact.
The “Headline Risk” bottom line is that the latest retail sales data didn’t “improve the economy’s fortunes” and it sure as heck didn’t “[ease] fears of a U.S. slowdown.” That said, the May retail sales data accomplished two critical things: it provided further evidence that Winter is here, and it confirmed that the Retail-iation macro theme is alive, well, and providing us with an opportunity to short U.S. retailers.
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