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.

Consumer Confidence Game and Housing's False Bottom

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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Signs of a "resurgent economy" are everywhere - at least if you believe the reporting of the mainstream media. The "recession appears to be over" and "the U.S. economic ship is finally righting itself" according to one 'expert' after another quoted in news articles. Examination of the data backing up these claims indicates the truth might be quite different. While there was supposedly 'good news' on consumer confidence and housing prices yesterday (as long as you didn't look too closely at the numbers), it was little noticed that the White House raised its projected budget deficits to a total $9 trillion between 2010 and 2019. The budget deficits for the next decade will only be this good as long as the economy is growing at a robust pace and inflation remains unusually low. This is the most optimistic possibility imaginable, with imagine being the key concept here.

The Conference Board released its monthly consumer confidence survey yesterday. It came in at 54.1 and was up from 47.4 in July. The results are very different form the University of Michigan survey which had consumer confidence plummeting only a couple of weeks ago. What caused the big rise? Consumer's view of the current economy are still highly negative, but they see a rosier future - especially after hearing how the economy is recovering every time the turn on the TV or open a newspaper. Surprisingly after being bombarded (perhaps brainwashed is a better term) with news about an improving economy, more survey respondents when questioned whether they thought the economy was going to get better said yes. To put the 54.1 number in context, the average number over time is 95. A robust economy has a number well over 100, so we are about at half that level.

According to Case-Shiller, U.S. housing prices have now gone up two months in a row - May and June. This got huge coverage in the mainstream media yesterday. Did this actually happen? Well, not exactly, if you're a stickler for details. The Case-Shiller numbers are not seasonally adjusted and late spring is usually the strongest part of the year for home sales. If you seasonally adjust the numbers, it turns out May was actually negative. June was still positive, but you would need a magnifying glass to see the number it was so small. Suppose you adjusted the numbers for the $8000 tax credit the federal government was giving first time buyers? Well, the June number would sort of be negative too. What about year over year numbers? Well for the entire U.S. they're down 15%. From the peak there has been a 30% drop so far. The 20-city index, which is the one that was up in May and June has fallen 45.3% since the 2006 top. Yeah, those numbers really scream recovery.

The underpinnings for a housing recovery are also just not there. Colonial BancGroup just filed for bankruptcy. It was closed down by the FDIC about two weeks ago and was the sixth largest failure in U.S. bank history. A lot of bad mortgages did it in. The bank is under criminal investigation for accounting irregularities (you should wonder how many other banks may have engaged in similar behavior, but have not yet been found out). Bank of New York is its biggest creditor. Yes, the big banks have exposure to these medium and small banks. Taylor, Bean & Whitaker Mortgage Corp., one of the largest independent mortgage companies in the U.S. was also forced into bankruptcy as well because it relied on Colonial for its funding. Bank failures can have a lot of collateral damage. So far this year we are at 81 and counting. Despite the 'resurgent' economy and 'bottomed' real estate market, I have a feeling there's going to be a lot more.

NEXT: Enron Accounting and GDP; FDIC's Money Shortage

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.