More on retail sales, small businesses and economic growth
There were three pieces of data today that give the complete picture for the consumer economy right now. My read of the data says we are now in a holding pattern awaiting more concrete evidence that the technical recovery which began last summer actually has legs and will become a real recovery. There are tenuous signs of renewed upward momentum in the economy. However, consumer demand remains sluggish as does the demand for hiring.
First were retail sales. I mentioned comments from Marc Chandler yesterday that suggested any headline number over 0.3% growth was going to be perceived as bullish. The headline number was 0.4% growth and equity futures rallied on the back of this. Nevertheless, the headline was a lot more bullish than the supporting data. While this was the second consecutive month for retail sales to increase, last month’s data were revised down to 0.3% from 0.4%. Moreover, sales numbers are still below the April post-recession peak after the two months of decline followed by two months of increase. Finally, I should add that much of the uptick was due to gasoline sales, suggesting it won’t add to GDP this quarter. Bottom line: this report was decent but not spectacular.
Second was the NFIB Index of Small Business Optimism. Here we also saw a gain, just short of expectations of 90.0 from 88.1 to 88.8. While it is encouraging to see this improvement, the reading of 88.8 is a recessionary figure. To wit, in the Rosenberg note I highlighted this morning, Rosenberg says that the average is 91.8 for this index during recessions. So, 88.8 is weak indeed. Now I posted the chief economist’s interview with CNBC this morning. The key takeaway from that interview is that small businesses in the U.S. do not see sales volumes increasing and consequently are not hiring, not investing in capital equipment and not asking for more credit. The report states:
Overall, 91 percent of the owners reported all their credit needs met or they did not want to borrow, unchanged from July. Only four percent cited financing as their top business problem. What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.
The last piece of data had to do with inventories. Business inventories rose 1.0% versus an anticipated 0.7%, pointing to a boost to Q3 GDP. The inventory to sales ratio is now 1.26, up from the low of 1.23 in April just before retail sales started to weaken. My read here is that businesses are modestly increasing their padding of inventories to meet anticipated future demand. And that suggests the inventory cycle has not lost steam. To me, this is encouraging because it gives us a bit more time to figure out how to get the baton handed off from government stimulus and inventories to jobs and a consumer-led real recovery.
Summarizing the three pieces of information, I would say that consumer spending remains weak and consequently so too does hiring and the growth in business investment. Large corporates are in a much better position to lead the way on this front. Small businesses are still hurting and are a principal reason credit growth is weak. To the degree government economic policy is aimed at jobs and business investment going forward, it should be targeted to small businesses.