Friday, March 12, 2010

Inflation and 'Adjustments' Explain Retail Sales and Inventory Reports

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Commerce Department just released reports on February retail sales and January inventories and business sales. As usual, the mainstream media republished the rosy view of the reports contained in government press releases. Even a cursory examination of the actual data indicates serious problems in the U.S. economy still linger and there is little if any reason to think things are getting better.

Retail sales are important because they represented 72% of U.S. GDP before the Credit Crisis. Without a continuing real increase in them, a sustainable economic recovery can't take place. Increases caused by inflation not only don't indicate recovery, but also indicate additional problems. The government's retail sales numbers are not adjusted for inflation. The place to look for inflation in the report is the gasoline sales figure, since if anything less gasoline is being purchased now than before the Credit Crisis. This number gives you a ballpark sense of whether or not the change in numbers was caused by inflation as opposed to selling more items. Year over year U.S. retail sales were up 3.9% in February. Year over year gasoline sales were up 24%. It is quite clear that inflation is behind the 'recovery' in retail sales and this is bad news.

The 'Manufacturing Trade and Inventories and Sales' report for January demonstrates the incredible impact of the government's statistical 'adjustments' can have on the numbers it publishes.  Inventories were reported as flat in January, but business sales were up 0.6%, the eighth consecutive rise. Table 2 in the report, entitled Percent Change in Sales and Inventories, tells a different story however. The change in the unadjusted numbers from December 2009 to January 2010 state that total sales were down 13.3%. This number was up 0.6% after adjustment. Sales for retailers were down 22.9% before adjustment. They were up 0.2% after adjustment. The chart can be found at:

Surveys of consumer sentiment indicate the public has a very different view of the U.S. economy than the government's public relations (a term invented early in the 1900s so the word propaganda didn't have to be used) story usually reprinted without question by mainstream media outlets. The University of Michigan survey, out the same time as the retail sale and business sales and inventory reports, showed a decline in consumer sentiment in February. The 12-month outlook had a fairly sharp drop. The last Conference Board consumer survey indicated a collapse in consumer confidence. Apparently consumers are reacting to their actual experiences with the U.S. economy and not the fantasy economy that exists only in government statistical offices in Washington, D.C.

Disclosure: None

NEXT: Moody's Sovereign Debt Assurances Should Concern Investors

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


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