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: http://www.census.gov/mtis/www/mtis_current.html.

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
http://investing.meetup.com/21

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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The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Another market bloodbath took place in Asia last night. The Nikkei fell a further 6.4% and took out its 2003 low of 7603 to close at 7162. This is now a 26 year low and it's not clear that even 18 years of selling has been enough to establish a long-term stock market bottom in Japan. The surging Yen is crushing exporters there. Drops were even bigger elsewhere, with the Hang Seng in Hong Kong falling 12.7% to close at 11,016. The 10,000 support level, broken during the Asian financial crisis in 1997, seems to be acting as a magnet for the index. The Philippines market, after dropping 12.3%, halted trading. Only Korea was up slightly after it cut interest rates three-quarters of a point, the largest cut ever there. The U.S. Fed, which is meeting this week, almost certainly took notice.

While the Yen is going up against the dollar, the euro continues its fall and hit 1.2461 in overnight trading. Oil hit 62.20 and is now down 57% from its mid-July high. The drop has been so sharp and so quick that gas prices in the U.S. have fallen 53 cents in only two weeks - just in time for the November election, where the high cost of fuel was a major issue eroding voter support for the Republican party. The U.S. dollar's strong rally against almost all currencies other than the Yen, engineered by central banks acting in concert starting this summer, is partially responsible for the fall in oil prices. Their dollar support activities have been so 'successful' that the trade weighted dollar was above 87.50 early this morning. If the rally continues, this could cause U.S. exports to drop off a cliff, as they did in the early stages of the Great Depression, and take the economy with them. The American financial media, which published one story after another about the beneficial effects of a falling dollar when the U.S. currency was sliding, has so far ignored the flip side of this story.

European markets, down in the 4% to 6% range in early trading, started paring their losses by mid-day. The U.S. markets did not open down that much, but it's the close that will be important. The Treasury announced today that it would begin distributing it gift bags of money from the Wall Street bailout bill to banks and this may be helping to limit selling. The U.S. Fed will be meeting this Tuesday and Wednesday and a 50 basis point rate cut is expected - more is possible and that would rally the market if it occurs. The New York Investing meetup predicted in fall 2007 that the Fed would move rates close to zero and this prediction seems to be coming to fruition.

Stocks are extremely oversold and resistance to further selling has been evident for the last few days of trading. Buying on any major drop should now be considered. It is likely that soon some event will take place that will rally the market and its beaten down segments. While the financials may still be overpriced (doesn't mean they can't rally substantially in the short term), sectors like the precious metal miners have been fallen to truly bargain level prices. Buying at a real discount is always a good way to make money in any market.

NEXT: Short Covering Rallies, Explosive and Brief

Daryl Montgomery

Organizer, New York Investing meetup
http://investing.meetup.com/21

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.