What Is Behind Struggling Sales?

By Karl De Jesus

The Commerce Department reported on Wednesday, February 14 in its U. S. Census Bureau January Retail Sales report that sales decreased 0.3% in January. Moreover, they revised December sales figures downward from the 0.4% rise initially reported to unchanged. This was followed Wednesday, March 14 by another report indicating sales had dropped 0.1% in February. After a strong 2017 fourth quarter, this continues a trend of stagnant sales from January to August 2017. Sales during those 8 months had the lowest standard deviation for that time period since data collection began in 1992. To highlight the problem, sales growth was lower than it was prior to major market drops in 1997, 2000, and 2007 or the follow-up recessionary years 2001 and 2008. In fact, only 2008, when sales were negative, had a lower January - August sales growth. Interim reports may have raised a glimmer of hope, but now that the good news from December have been rescinded and with January and February adding to the negative trend, these sales report should give pause.

Some, like Scott Anderson, chief economist at Bank of the West in San Francisco, have attributed the weakness to bad January weather putting building projects on hold and keeping consumers away from auto dealerships. Maybe the weather did not cooperate again in February but I suggest there is an alternative explanation - the shortfall of peak spenders I have previously written about.

In fact, slowing auto and building project demand serve as confirmation of the shortfall since this is precisely what one would expect from a reduction in the peak spender population. Demographically, peak spenders are 46-50-year-olds whose kids have moved out and no longer have to shell out money for college. These are folks who suddenly find themselves with a lot more disposable income and use it to purchase big-ticket items such as cars, new homes or a home remodel. A reduction in that population would, therefore, affect those industries directly.

Unfortunately, the impact of this trend is being swept under the rug as wage increase and inflation fears take the limelight. The focus is now on Department of Labor, Bureau of Labor Statistics reports which saw January hourly earnings jump 2.9% on an annual basis as compared to the 2.7% rise in December. That was the largest rise since June 2009. Hourly earnings moderated in February but still gained 2.6%, above the Fed's 2.0% inflation target. Regarding inflation, the Bureau of Labor Statistics also reported its Consumer Price Index swelled 0.5% in January, as compared to December's 0.2% climb, although CPI moderated in February back to 0.2% growth. The only reason the year-on-year CPI increase for January and February remained at 2.1% and 2.2%, respectively, is that some of last year's large price gains dropped out from the tabulation.

This is no time to ignore sales figures. Once the shortfall in peak spenders takes hold in earnest later this year, sales will be forced on a downward trend. Given that the shortfall is not transitory but will persist and even exacerbate in future years, the slide in sales will precipitate. By contrast, the current inflationary pressures ARE temporary. Eventually, we will see less demand for products, more layoffs, lower wage increases and as a result, lower inflation.

Considering those prospects, we should be seeing measures aimed at curtailing a major economic downturn. Sadly, we have been feeding at the trough of easy money for too long and the Fed is, understandably, itching to take away the punchbowl. What we will see instead are continued Fed rate hikes like the one we saw March 21, which will raise borrowing costs for both corporate and government debt. The first will put pressure on corporate profits even as their top line goes down. The second will increase federal government debt payments on our ballooning national debt giving it less wiggle room to help during the approaching economic storm.

I am an investor, two decades plus student of the market, professor, and author of "And Then the Tempest - The Imminent Financial Meltdown is Real and What to do About it." I was the founder and chairman of the Idaho State University Budget Committee in 2007. As such, I warned the university of the impending recession and real estate crisis and helped steer finances during those tumultuous years. Today, I warn folks of a coming economic storm, indeed, it's already knocking at the door and could prove more catastrophic than the Financial Crisis. Check out my website, http://www.megabearmarket.com, to find out more.