Deflation exaggerates retail-sales decline
The December retail sales results were terrible, no doubt. You know it's bad when removing the miserable auto-sales business from the total IMPROVES the result. Not counting autos, retail sales declined 3.1 percent in December from November. Counting autos, total retail sales declined 2.7 percent. That was still more than twice what economists predicted. (Story here.)
There aren't many ways to sugar coat the numbers, but I'll try. First of all, these are seasonally adjusted, which is problematic. December retail sales are the seasonal variant to end all seasonal variants. December sales weren't really 2.7 percent less than November's. Are you kidding? The holiday shopping season always makes December huge. But Census Bureau statisticians adjusted the December results so they could try to make a month-to-month comparison with November. This is fraught with difficulty and prone to error. Still, there is one way to get around seasonal-adjustment potholes: compare the numbers from December 2008 with those of December 2007. Result: Major ugliness. Year-over-year sales for December, the most important shopping month of the year, were down 9.8 percent. No way to pretty up that warthog.
The other thing making the numbers look bad is something that wasn't adjusted for -- changes in the consumer price index. Just as inflation makes unadjusted sales increases look better than they really are, deflation makes unadjusted sales decreases look worse than they really are. Stores probably didn't sell 9.8 percent fewer units this December compared with last December; but thanks to deflation and door-buster sales what they did sell fetched 9.8 percent less at the cash register.
The most striking example is gas stations, whose sales plunged 36 percent from December 2007 to December 2008. But most of that, of course, is the plunge in the per-gallon price, not a decline in the number of gallons sold.
UPDATE: Calculated Risk notes that Census calculates that REAL, price-indexed, deflation/inflation-adjusted retail sales fell year-over-year by even more than the nominal number. But the Census people used November price-change history to adjust the number, and deflation probably accelerated in December. Look, I'm not saying the numbers aren't ugly. I'm saying don't take them totally at face value.
Comments
You may call it an overall economic deflation whether or not price of crude oil has anything to do with it. But how much of the "deflation" was due to liquidation of seasonal goods through promotional markdowns given the macro environment? Isn't the cause of deflation is primarily due to the pressure of good inventory practice of not carrying unwanted or undesirable products beyond the key selling period? I believe it is. And if so, this makes retailers holding less cash to be profitable, to pay rent and payroll, and even less tax for the government.
And lastly, the relative comparison of month to month may not be the best measure, but as long as the quoted metric can be compared to the prior year's Dec to Nov ratio then it is valid. Oh by the way, "COMP Store" sales was down 1.7% approximately in Dec and that's an year over year comparison resulting from a survey of 170 retailers of various sizes and category.
It's bad and I would not sugar coat anything but I wouldn't start a stampede either. It is what it is and procede under advisement.
Posted by: Jerry C | January 14, 2009 12:53 PM
Stores were doing 70 percent mark downs -- it's easy to see how the raw numbers would go down.
However, I was in Target yesterday and it seemed as busy as what I would expect in December.
The second people calm down and see all the great bargains they'll be running into the stores.
Also, e-tailer Amazon had their best year ever...so maybe we should be looking at the results of the most successful retailer.
When I was in the mall I noticed that a lot of the outlets were trendy stores that have been around for more than a decade. Teenage customers won't shop in "American Outfitters" and "Rave" for years and years....retail is failing to come up with new ideas, new stores.
So, for these reasons, I say, business is good.
Posted by: John Bailo | January 14, 2009 1:33 PM
Retailers think the consumers are idiots and they are not (at least not anymore). I don't know much about the macro- and microeconomics, but I go to the stores and can tell you as it is. All the malls were crowded this year, but there was nothing to buy. At Macy's I saw the same exact sweaters as my mom bought 3 years ago and at the same price. They used to carry more quality brands, like Ann Taylor or Calvin Klein, but those have been pushed aside by Macy's own brands. And it's not because the consumers want it, it's because Macy's gets better profit margin on their own stuff (which is mostly hideous and poorly made).
Same thing has been going on at Target for years. They used to have a store brand mouthwash in smaller bottles (about 0.75 l), which were easier to hold, but now you have to buy like a gallon size. I can't even hold it with one hand, much less pour mouthwash into a tiny cap from it! Out of 5 or so available varieties of St.Ives shower gel they now carry only 2. Those are not the ones I like - oh no, those are the ones better for Target's profit. But, excuse me, if the store don't care about my needs, why would I spend my money there?
The retailers simply have completely lost the sight of what should be really important for them - consumer needs. As simple as that.
Posted by: Jelena | January 14, 2009 2:18 PM