Retail Sales March 2024: No Landing Means Rates Higher For Longer

The Census Bureau just published its Advance Report on Monthly Sales for Retail & Food Services. Released at 8:30 AM, April 15, 2024, this report – widely considered to offer some of the best and most timely high-frequency indicators of current U.S. economic activity – provides initial data on consumer spending at U.S. retail establishments for March 2024.

In this article, we provide in-depth analysis of the just-released data and then discuss their implications for the U.S. economy and financial asset prices.

According to the Census, Retail Sales expanded by +0.72%, surprising to the upside by +0.32%.

The question now is: Based on a thorough analysis of the Retail Sales data, and the initial market reactions to it, should investors make any adjustments to their economic forecasts, and/or to their investment strategies?

The right answer is never an obvious one. Success in investing largely depends on finding difficult-to-obtain information and/or insights that supply an informational and/or analytical edge. This requires both diligence and skill. Our method, focused on five key questions, helps us generate an edge from analyses of just-released economic reports:

1. Was there any surprise?

2. What caused the surprise?

3. Did the surprise alter the macroeconomic outlook?

4. Is anything in this report being misunderstood or overlooked?

5. Has the initial market reaction given rise to any actionable opportunities?

In this article, these questions will be addressed as we walk readers through a four-step process… First, we will perform a comprehensive analysis of the just-released report… Second, we will update macroeconomic forecasts, based on this analysis. Third, we will adjust our investment assessments of major asset classes. Finally, we will deliver actionable insights that will enable readers to capitalize on our analysis.

Headline Data

We begin our analysis of the Advance Retail Sales Report by reviewing summary information highlighted in Figure 1. We recommend that readers pay particular attention to the percent rank of Month-on-Month (MoM) growth, MoM acceleration, and the surprises relative to forecasts.

Figure 1: Change, Acceleration, Expectations, and Surprise

The nominal dollar value of Retail Sales (not adjusted for inflation) for March 2024 totaled $709,590 million at a monthly annualized rate. The +0.72% MoM rate of change was above the historical median, ranking in the 65th percentile. This month’s change represented a -0.22% deceleration from the prior month, only after last month’s large upward revision.

Data for prior months was also revised up, leading to an even greater overall upside surprise.

A DEEP DIVE INTO THE CENSUS DATA

In this section of our report, we will walk our readers through a comprehensive analysis of the latest Shipments data. The analysis is broken down into three subsections: 1) Analysis of the impacts of inflation; 2) Rates of change and momentum of the components; and 3) Attribution analysis. Our goal in this section is to pinpoint the specific causes of any major accelerations and to uncover anything which may have been misunderstood or overlooked by market participants.

Prices Matter: The Impact of Inflation and Deflation on Retail Sales

In this subsection, we highlight the impacts of price changes (inflation or deflation) on Retail Sales data. Any serious analysis must seriously consider this matter because price changes directly affect the quantity of goods and/or services that a given amount of money can purchase.

In Figure 2, we show Retail Sales in both “current dollars” and in “real” terms. The “real” figures adjust the nominal current dollar figures for the changes in purchasing power caused by inflation/(deflation).

Figure 2: Real Sales in Current Dollars and Adjusted for Inflation

As can be seen in Figure 2, Retail Sales in current dollars during March were estimated to have grown by +0.72% MoM. However, prices grew by +0.17% during the month. Real Retail Sales, which adjusts the current dollar spending figures for inflation, is estimated to have grown by +0.55% during this past month, accelerating by +0.5% in real terms from the prior month.

For the remainder of this article, all figures will be presented in “real” (inflation-adjusted) terms. This is important because the most important indicators of economic activity in the U.S. economy, such as Real Gross Domestic Product and Real Gross Domestic Output, are accounted for in real-inflation adjusted terms.

Rates of Change and Momentum of Real Retail Sales

In this section, we break down Retail Sales into key components, scrutinizing their annualized growth rates over various time frames (1m, 3m, 6m and 12m). The purpose of this analysis is two-fold. Our first purpose is to identify which components of retail sales are growing at a faster or slower rate than the overall aggregates. Our second purpose is to determine whether, and to what extent, growth rates are accelerating or decelerating over various time frames.

Figure 3: Real Annualized Growth Rates of Key Components

Strength and momentum of overall growth. As can be seen in Figure 3, overall real retail sales growth, on a 3-month annualized basis (1.51%), was in the 33rd percentile, while the rate of change for the most recent month was in the 66th percentile. Notably, Real Retail Sales is showing momentum with the 6-month rate in the 29th percentile, the 3-month rate in the 33rd percentile and the 1-month rate in the 66th percentile.

Divergences in rates of change between categories. During the past 3 months the growth of the Retail control group was in the 45th percentile while the Ex-Retail control group lags in the 28th percentile.

Attribution Analysis: Change and Acceleration of Real Retail Sales

In this section, the analysis is focused on identifying which components of retail sales are driving the MoM growth (contraction) and MoM acceleration (deceleration) in the overall Retail Sales figures. We develop this analysis in three steps. First, we analyze the contributions of the Control Group and the Ex-Control Group to the reported overall MoM growth and acceleration of Retail Sales. Second, we focus exclusively on the Control Group and break down the component contributions to its reported MoM growth. Third, perform the same analysis for the Ex-Control Group.

Contributions to Change and Acceleration from Control Group & Ex-Control Group

In this subsection, we focus on the contributions of the Control Group and Ex-Control Group to the MoM growth and MoM acceleration of Retail Sales.

Figure 4: Control Group & Ex-Control Group Contributions to MoM Retail Sales Growth

The Retail control group contributed 0.56% to acceleration, while everything else excluding the Retail Control group contributed -0.61% to acceleration.

Control Group: Analysis of Component Contributions

In this subsection, we focus the component contributions to the MoM Change and MoM Acceleration of the Control Group.

The Retail Sales Control Group excludes spending on automobiles, gasoline, building materials, and food services. By removing these volatile and/or otherwise unrepresentative components, the Control Group typically provides a better indication of underlying trends and tendencies in consumer spending.

Figure 5: Control Group: Contributions of Components to Change and Acceleration

The largest contributors to the acceleration of the Retail control group were Nonstore Retailers (+1.06%) and General Merchandise Stores (+0.16%). While the largest contributors to the deceleration of the Retail control group were Clothing and Clothing Access. Stores (-0.16%) and Sporting Goods, Hobby, Musical Instrument, and Book Stores (-0.05%).

Ex-Control Group: Analysis of Component Contributions

In this subsection, we focus the component contributions to the MoM Change and MoM Acceleration of the Control Group.

The Ex-Control Group consists of sales by retail vendors in four major categories: Motor Vehicles and Parts, Building Materials & Gardening Equipment, Gasoline Stations and Food Services & Drinks. Monthly growth in these categories often tend to be volatile and/or otherwise unrepresentative of overall trends and tendencies in consumer spending. Therefore, monthly Ex–Control Group sales growth numbers need to be analyzed in an appropriate context. However, taken as a group, it is important to note that the overall incidence of Ex-Control Group sales is important, representing 41.27% of total Retail Sales for this month.

Figure 6: Ex-Control Group: Contributions of Components to Change and Acceleration

The largest only contributor to the acceleration of the Ex-Retail control group was Gasoline Stations (+0.29%). While the largest contributors to the deceleration of the Ex-Retail control group were Motor Vehicle and Parts Dealers (-1.26%) and Building Mat, and Garden Equip, and Supplies Dealers (-0.22%).

It should be noted that Real Retail Sales, excluding the highly volatile Motor Vehicle and Parts Dealers, accelerated significantly higher (+0.69%) than Real Retail Sales (+0.05%).

U.S. Economy Outlook: Implications of the Retail Sales Data

In this section, we address the following question: Based on our comprehensive analysis of the just-released Retail Sales data, what (if any) changes should we make to our macroeconomic forecasts and/or our overall outlook for the U.S. economy?

Updates to U.S. Economic Forecasts

Let’s begin with a brief review of forecasters’ expectations leading into this report. The median forecast of professional economists expected the Census to report that Retail Sales grew by +0.40% during the most recent month. However, Retail Sales surprised to the upside, coming in at +0.72%.

Assuming that this forecast had been entirely correct, and that there were no revisions to prior data, the 3-month annualized change of Nominal Retail Sales would have contracted by -0.33. As it turns out, reported data, after revisions, indicate that Retail Sales grew at a 3-month annualized rate of +3.15%. The figures were much stronger, excluding volatile auto sales.

As a result of today’s report, economists’ forecasts for growth in 2024 will need to be revised up.

Update of the Overall Outlook for the U.S. Economy

How do these updates to forecasts to Retail Sales affect our overall outlook for the U.S. economy? Currently, the overall outlook for the U.S. economy is dominated by whether the U.S. economy will achieve a “soft-landing.” How does our thorough analysis of the just-released Retail Sales data impact the analysis of this question?

The strong rate of growth of retail sales in March — particularly the Control Group — is providing additional evidence that the U.S. economy is currently in a “no-landing” scenario. Indeed, in addition to accelerating inflation, most indicators of economic activity are showing that economic growth is proceeding at a roughly average pace, and accelerating.

This month’s strong Retail Sales report will allay concerns about economic growth and will focus attention on inflation. The implications of recent inflation and economic activity data is that financial conditions are not tight enough for a “soft landing.” There is no “landing” in economic growth, and inflation is actually gaining altitude rather than landing.

We think that current market expectations regarding the extent and timing of Fed easing of monetary policy are likely to be further disappointed. We believe that there is a better than even chance that the Fed will not cut interest rates at all in 2024. However, the Fed Funds futures market currently only prices in an 15% chance of such an outcome

Furthermore, we believe there are under-appreciated risks to the inflation outlook which could cause a severe tightening of financial conditions. Among these are a potential oil price shock due to instability in the Middle East.

Therefore, we believe that financial markets are generally not sufficiently prepared for the risk that financial conditions could tighten significantly in the second half of 2024.

Market Outlook

The relatively strong retail sales data caused a substantial increase in the 10-year Treasury yield (US10Y). In general, with inflation running hot, any indications that the economy is growing at a rate that is average or above will tend to raise concerns about inflation and about the path of Fed rate cuts. With inflation as high as it is, as long as the economy is growing at an average pace, there is very little justification for the Fed to lower interest rates.

Will an overbought and over-positioned equity market be able to handle this sort of potential disappointment in terms of Fed policy going forward? Today, the U.S. equity market is up strongly in pre-market trading, primarily due to relief over developments in the Middle East. However, in the intermediate term, it will be difficult for U.S. equities to advance if inflation expectations and bond yields continue to rise. We see many headwinds for U.S. equities in the coming weeks and months.

Most importantly, we see the potential for some massive negative macro surprises on the horizon, driven by rising oil prices. Our most recent article goes into detail regarding various “oil price shock” scenarios.

Concluding Thoughts

Our Investing Group team has been positioning our portfolios in a manner that accounts for likely disappointments of market expectations regarding Fed policy.

Most importantly, we are also positioning our portfolios for the risks of severe oil shocks, particularly in the second half of 2024.

Indeed, we think that very extraordinary opportunities are going to emerge in the second half of 2024, starting sometime between June and August.