Factoring in Inflation, Retail Sales Remain Very Weak in September

October 14, 2022

•

3:50 pm

•

30 comments

•

Economics

Retail sales data from Commerce Department, CPI adjustment by Mish

Advance Retail Sales

Today, the Commerce Department released Advance Retail Sales Data for September.

Advance estimates of U.S. retail and food services sales for September 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $684.0 billion, virtually unchanged from the previous month, but 8.2 percent above September 2021.
Total sales for the July 2022 through September 2022 period were up 9.2 percent from the same period a year ago.
The July 2022 to August 2022 percent change was revised from up 0.3% to up 0.4 percent.
Retail trade sales were down 0.1 percent from August 2022, but up 7.8 percent (±0.7 percent) above last year.
Gasoline stations were up 20.6 percent from September 2021
Nonstore retailers were up 11.6 percent from last year.

The key phrase is “but not [adjusted] for price changes.“

Advance Retail Sales Month-Over-Month

Real vs Nominal Sales Discussion

Real sales peaked in March of 2021 (first chart, first blue highlight).
There was a bounce in April of 2022 (first chart, second blue highlight).
In nominal terms, retail sales rose in 6 of the last 7 months.
In real terms, retail sales fell in 5 of the last 7 months.

Real vs Nominal Advance Retail Sales Long Term

Real Retail Sales peaked in March of 2021. Since then they have fallen 2.4 percent. Such weakness is consistent with recession.

Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession

For discussion, please see Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession

Cyclical Components of GDP, the Most Important Chart in Macro

If you missed it, please note Cyclical Components of GDP, the Most Important Chart in Macro

My follow-up article was A Big Housing Bust is the Key to Understanding This Recession

Housing leads recessions and recoveries and housing rates to be weak for a long time.

Add it all up and you have the opposite of the Covid-recession, a long period of economic weakness with minimal rise in unemployment.

Prime Day Falls Flat, Black Friday in October Again

Yesterday, I commented Prime Day Falls Flat, Black Friday in October Again, Who Cares?

The September retail sales report is out tomorrow. The Bloomberg Econoday consensus is for a 0.2 percent rise. I’ll take the under.

Regardless, its “real” inflation-adjusted sales, not nominal sales that drives the CPI, and the CPI rose 0.4 percent.

It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it’s over. That happened once already.

What does matter is the Fed will likely keep hiking until the economy collapses. It won’t be fun.

This post originated at MishTalk.Com

Please Subscribe!

Like these reports? I hope so, and if you do, please Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

If you have subscribed and do not get email alerts, please check your spam folder.

Mish

Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

This post originated on MishTalk.Com

Thanks for Tuning In!

Mish

30 Comments

Newest

Oldest Most Voted

Inline Feedbacks

View all comments

Captain Ahab

1 year ago

The Fed is caught between between aggressive corrective action and finagling the money supply/continuing negative real interest rates in perpetuity. BTW, both support spendthrift and irresponsible government, while transferring the people’s hard-earned wealth to the already-corpulent financial sector.

The problem is if the Fed feed-trough enables the pigs’ gorging to continue, the ‘pigs’ get even more addicted. The longer it goes on, the worse it will get. Corrective action will be impossible. Purging obese ‘pigs’ is not only prudent and timely, but essential.

How far must the Fed go?

To begin, the Fed funds rate must equal the opportunity cost of borrowing short-term for ‘zero’ risk–anything else is a subsidy. That rate logically includes adequate compensation for inflation (currently at 8.2%). Also real economic growth should be included, at a minimum equal to the population growth rate (to sustain living standards), which has ranged from 0.31% to 0.64% during the last four years. Over the same period, GDP real growth has ranged from -3.40% to +5.67%, with a long term average near 3% per year.

IMHO, the Fed funds rate (currently) should be about 11%!

A 4% Fed funds rate only exists because the pigs demand continued life support, no other reason.

The Fed dilemma :

a) Seven increases of 100 basis points (each) will crash the economy–negative real growth could be 5% or more. Fed members will likely lose their jobs, if not their heads.

b) Praying that inflation is (still) transitory, and if they hold their breath long enough it will away. The sun will shine, the economy will blossom, and the pigs will be happy.

c) Biden will have a dementia moment, and resign. With Kamala at the helm, can they blame the US first female president?

My fear is the Fed is doing what it needs to in order to be seen trying. However, it knows it has already lost control–evidenced by recent market movements. The high CPI report should’ve been a down day. Indeed, the market dumped, then rocketed up–it was a pig fest.

MPO45

1 year ago

Reply to Captain Ahab

IMHO, the Fed funds rate (currently) should be about 11%!

Interestingly, the CNBC talking heads all week (proxy for Corporate CEOs), all insist that the rate can’t breach 5%….fun times are head in 2023. Got PUTS?

Captain Ahab

1 year ago

Reply to MPO45

I just wrote a long explanation, with an example, but it has to be reviewed first. Meaning my comment will never appear.

Effectively, the Fed gets to 10-11% by a NEGATIVE 4-5% GNP, when the Fed funds rate is about 5%. This is a serious crash.

it also explains why Mish writes, “What does matter is the Fed will likely keep hiking until the economy collapses.”

The economy has to crash in order to recover.

hmk

1 year ago

Reply to Captain Ahab

Please clarify that statement. If we get a negative GDP and inflation is still 8% and FFR is 5% its still a negative interest rate despite GDP being negative. Am I missing something? Its a serious contraction but if inflation is still hot the fed is in a conundrum. Similar to the stagflation of the 70-80’s.

worleyeoe

1 year ago

Reply to MPO45

The Fed can’t raise the FFR anywhere close to 11%, A 5% terminal rate is the absolute max. What the Fed can do though is to start selling MBS which will cause the 30YFRM to rise even more ensuring a real housing recession which will lead to a broader recession. Our $31T national debt IS the King Kong constraint on the Fed nowadays.

The Fed’s slow poke approach was intentional. They hoped inflation would break sooner, but we now know it’s not going to. IMO, a main driver of incremental inflation has been illegal immigration to the tune of 4.5M since FJB arrived on the scene, creating all sorts of rent, food & healthcare inflation. Nobody wants to talk about this major inflationary issue. But, it’s real & growing.

The market shot up simply for no other reason than quants pushed it higher only to bail JIT to cut loses.

I whole heartedly agree with your post, btw! I think we both know a 11% FFR is delusional.

Maximus_Minimus

1 year ago

Reply to Captain Ahab

Long but true. Usually such analyses are ended by saying: nobody could have seen it coming (especially not ivory towers and those at the trough, er…committee).

Even die hard pessimists forgot how to say kicking the can down the road, but we are finally there, only worse.

WW3 now looks like a planned fallback plan, only not by your favorite whipping boy, who enjoys his autumn of life.

hmk

1 year ago

“What does matter is the Fed will likely keep hiking until the economy collapses.” Is this a criticism or statement.? Would you suggest a different approach? Powell needs to demonstrate that he is going to break the back of the fed put. This will also begin to resolve the inequality divide that the fed created. When you break the fed put you go back to free market capitalism. The levereage and economic detritus needs to be cleared out of the system and if things break, it needs to be done. TINA to correcting the feds malpractice. Its like saying a heroin addict shouldn’t go through withdrawal because it will be “painful”. As an aside the MOVE index is signaling a credit event is coming.

Captain Ahab

1 year ago

Reply to hmk

With regard to ‘hiking until the economy collapses’, my interpretation is likely different than Mish’s. However, IMHO, the economy must collapse to repair itself.

Remember how we got to the current situation? Too many years of negative real rates while the economy was growing in real terms at about 2-3% per year, with inflation near a 2% target. Life support was not needed, yet any attempt to hike rates from near zero to 4% was strongly resisted by Wall Street and a spendthrift government. They wanted the wealth transfer that resulted.

One way of getting to an ‘opportunity-cost-based’ Fed funds rate (and all interest rates/yields by extension)…

Assume the free-market would, under normal conditions, lend (to the Fed) at an overnight rate of 10 percent (annually). That is, compensation for current 8% inflation plus 2% real growth.

Instead, the Fed sets the rate at 4%. The next hike goes to 4.75%–the economy slows. Then, at 5.5%; at which point, the economy finally collapses, and real economic growth is, say -3%.

Now, the important question: what is the ‘effective’ interest rate? Note, the 5.5% does not cover 8% inflation. The lender is losing 2.5%. However, in real terms, lenders are not ‘exposed’ to the 5% of real decline (the difference between +2% and -3%). The ‘effective’ interest rate with crashing is 10.5%.

That 5.5% interest rate suddenly looks good when companies are going bankrupt and people lose their jobs/houses.

Mish also states fears of the Fed going too far. In the example, they have, by 0.5%

An ‘effective’ rate of 10% will likely be enough, unless inflation accelerates (by getting into the wage structure–as in 1980). As inflation stops, and drops, the effective rate will decrease…

PapaDave

1 year ago

Consumers will continue to focus on needs (food, shelter, health, energy) and reduce discretionary spending.

“Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession”

Agree.

Also; expect continued volatility in markets, with lots of big swings up and down as witnessed recently. Makes for great trading opportunities.

Oil and gas companies are going to continue to outperform for the foreseeable future, unless there is a very deep recession.

Looking forward to more of these companies declaring dividend increases and special dividends, as they are just gushing cash flow at these prices. Yesterday, it was Birchcliff energy, declaring a special dividend of 20 cents/share and increasing their base dividend in 2023 ten fold to 20 cents/share from 2 cents/share.

Captain Ahab

1 year ago

Reply to PapaDave

1: It is easy to make money in a rising market.

2: It is easier to lose money in a falling market.

3: It is risky as Hell in a volatile market.

My investment strategy: Understand and play the ‘business cycle’ relative to the long term trend. Buy close to the bottom. Sell close to the top. I am usually within 10-20% of inflection points.

Seek shelter (cash, gold, utilities, storage) when the economic barometer drops.

No leveraged investments, ever.

Avoid unnecessary risk except to invest in innovation (about 1 in 5 pay off in the long term).

MarkraD

1 year ago

Reply to Captain Ahab

“Buy close to the bottom. Sell close to the top.”

Oh yes, of course.

worleyeoe

1 year ago

Reply to Captain Ahab

Agreed 100%. I’m not a quant, and I don’t want to be. Unless something comes out of nowhere to amazingly kill inflation, we’re not near the market bottom until the first quarter of a real recession comes to pass.

Tony Bennett

1 year ago

“Housing leads recessions”

…

Redfin Reality:

SEATTLE–(BUSINESS WIRE)– (NASDAQ: RDFN) —The housing market is taking a second hit this month as increasing economic volatility and persistent inflation pile on top of mortgage rates that just reached a 20-year high, according to a new report from Redfin (redfin.com), the technology-powered real estate brokerage.

Pending home sales and new listings both posted even bigger annual declines than during the summer when buyers and sellers initially reacted to rapidly rising rates. Data on sale prices, which typically lags a couple months behind other demand indicators, is also weaker than it was over the summer when the pandemic homebuying boom ended. The share of home listings with a price drop rose to its highest level on record, and the portion of homes sold above final list price dropped to its lowest rate since the early days of the pandemic.

“Prospective homebuyers and sellers barely had time to get used to 5.5% mortgage rates over the summer before they rose to nearly 7% this month,” said Redfin Deputy Chief Economist Taylor Marr. “The second sharp rate increase this year, together with nerves about inflation and the direction of the economy, is dragging home-sale activity down further than it was over the summer and pushing homebuyer sentiment down near its all-time low. The combination is also unnerving for homeowners who don’t want to list their home when demand is weak or give up their own low mortgage rate.”

link to investors.redfin.com

MPO45

1 year ago

Reply to Tony Bennett

Where do you think mortgage rates will be at the end of Dec? A 75 bps hike seems a forgone conclusion for November.

Tony Bennett

1 year ago

Reply to MPO45

Don’t know. Depends on when something “breaks”. Till then I don’t see much, if any, drop.

MarkraD

1 year ago

Reply to MPO45

“… A 75 bps hike seems a forgone conclusion for November.”

I’m not so sure of this, with job openings dropping 10% this month, the Fed knows rate changes are slow reacting atop the fact that food/energy prices are a result of supply, if they hike too much now it could result in the opposite problem next year.

Mind, while they’re now aware they reacted too slowly in 2021, they’re also aware of reacting too brashly, they might factor telltale signs that rate hikes are working

3% this past year is big, just observing the housing market “should” be enough to gauge the residual long term effects.

MPO45

1 year ago

Reply to MarkraD

What is the Fed trying to do? Get to 2% inflation.

Where are we right now? 8.2%

How do we go from 8.2% to 2% with interest rate of ~3%? It can’t happen mathematically. Jobs are irrelevant, demand needs to be crushed and prices need to be crushed. As it stands now, the best case for 2023 is to get down to about 5% or maybe 4% if all the stars line up perfectly which is unlikely.

If the fed stops hiking we could have high inflation for all of 2023 and into 2024.

And dont forget inflation is high all over the world, that too will take a long time.

Captain Ahab

1 year ago

Reply to MPO45

With a big enough ‘crash’ we get 2% inflation and 2% real growth, and a Fed funds rate of 4%, which is where it should have been for most of the last 12 years.

MarkraD

1 year ago

Reply to MPO45

“Where are we right now? 8.2%”

Yes, and again, Fed policy is residual, slow to arrive in results. They’ve already bumped up 3% this year, we seem to be slowing since June’s spike.

A Fed hike now doesn’t show up for months.

Given a choice of inflation or deflation, monetarists definitely fear deflation more.

That said, I’m not betting the farm either way, just offering caution if you’re short, especially where other influences could stop inflation in energy and food (Ukraine, for starters)

worleyeoe

1 year ago

Reply to MPO45

Remember the Fed’s target is PCE inflation which strips out food & fuel costs. PCE just ticked up to 6.6%, so it doesn’t have to fall from 8.2%. Be that as it may, the FFR will have to rise up to about 5% before it really begins to reverberate within the larger economy outside of housing.

3 year brokered CDs are already at 4.5% with call protection. Once the FFR breaches 4% in early Nov the 3Y coupon will rise to 5%, creating a long & steady outflow of monies from the markets into fixed assets. The question is how long can the Fed hold onto a 5% FFR, if inflation doesn’t drop was quickly as its dot plots incorrectly assume it will.

The Fed will start to sell MBS by January which will be the final nail in the coffin for residential construction. They had hoped the housing market would tank just enough to create a small uptick in unemployment which would have mostly resolved inflationary pressures. Now, they have a growing understanding that their MBS portfolio will have to be sold off in part to induce a recession.

The Fed is FFR bound not to exceed 5%, at least for a anything longer than six months.

Russell McDowell

1 year ago

“What does matter is the Fed will likely keep hiking until the economy collapses.”

The Fed is putting most of the emphasis on hiking rates and not enough on unwinding its balance sheet. Holding rates at zero for so long was a big mistake but implementing QE which permitted the explosion in money supply was the much larger offense. QE destroys the integrity of forthright bond issuance and honest debt repayment although it is a remarkable tool for inflating asset prices (and destroying the purchasing power of the have-nots but I digress).

We’ll see how far they get with QT, but they seem committed to keeping a bloated balance sheet ostensibly to keep enough reserves to facilitate their interest-rate targeting and smooth operation in the repo market. As we’ve seen in the UK, the printing press will prove to be a difficult crutch to relinquish.

KidHorn

1 year ago

Reply to Russell McDowell

The FED is stating to wind up QT. I think they’re capped at about 60b treasury and 35b MBS and I think that’s about what they’ve sold over the last month.

Tony Bennett

1 year ago

Reply to Russell McDowell

“We’ll see how far they get with QT”

…

I’ve penciled in > $12 trillion before < $8 trillion.

I know they don’t want to go that route. They will. At gunpoint, if necessary.

vanderlyn

1 year ago

Reply to Tony Bennett

per shadow stats and fed res of st louis, money supply has been growing. forget the bs of fed balance sheet………non tightening.

MarkraD

1 year ago

“… a long period of economic weakness with minimal rise in unemployment….”

We live in strange times.

MPO45

1 year ago

Reply to MarkraD

If the quote is a true statement then the logical outcome is to move capital to locations/countries that WILL have strong economic growth. And that’s exactly what I’ve been doing. India seems poised to take over manufacturing from China and I’ve been looking at ETFs there. There are other places too which I won’t get into here because I’m quiet profiting™ and many here are experts at doing their own due diligence.

Sadly, when repubs take control of congress and cut social security and medicare there may be greater economic weakness and possibly a rise in unemployment. We’ll see how the midterms go and keep an ear out for the rhetoric.

MarkraD

1 year ago

Reply to MPO45

Emerging markets in general, like Vietnam and some south America countries.

Per capita GDP can also gauge potential, of which India is among the lowest, good idea.

That said, also foreign government plays a role in that growth as well, just looking at numbers, Russia would look fantastic, but their oligarchy is kleptocratic.

As for Repub’s, while I was surprised at their recent moves on abortion, I highly doubt they’ll attack seniors – that’s a massive amount of their base, Paul Ryan learned that the hard way.

MPO45

1 year ago

Reply to MarkraD

That said, also foreign government plays a role in that growth as well, just looking at numbers, Russia would look fantastic, but their oligarchy is kleptocratic.

Russia has terrible demographics, probably second worst with Italy being #1. I don’t expect much from Russia, their golden days are behind them. I wouldn’t invest a dime there no matter who was in charge or what type of government.

The key is either quantity (India) for the cheap labor or quality (countries x,y,z) for great innovation. In either you need a young and growing population. I’m not the only one looking, was shocked at the places big tech has been opening huge operation centers around the world. Follow the money…

Esclaro

1 year ago

Reply to MarkraD

Of course they will eviserate seniors because that’s what they need to do to satisfy their money men. As long as they can tell the electorate that they can have their AK47s and transgender girls can’t play sports all is well in this soon to be finished dystopia!

MarkraD

1 year ago

Reply to Esclaro

I’ll never forget the extremes back after the ’08 crisis, calls for austerity at the worst possible time, attempts to stop healthcare reform, and Ryan’s “Path to Prosperity” that suggested regular Americans live in squalor for 75 years to avoid undoing wealthy tax cuts.

I mention these things because it all backfired, Ryan’s out of politics, as is much of the “Freedom Caucus” / “Tea Party”.

That extremist void seems to have been filled by Trumpism, I highly doubt cutting seniors is something they want to attempt again any time soon.

Smile, not everything’s doom n’ gloom, I, hope.

Factoring in Inflation, Retail Sales Remain Very Weak in September

Share this:

Recommended Articles

Stay Informed

Subscribe to MishTalk