While data was sparse last week, news out of the retail sector was truly stunning with 8.7% same-store sales growth in March. Pending home sales also showed a surprising gain. Meanwhile, initial unemployment claims became unintelligible yet again because of a California holiday and funky seasonal adjustment factors.
Given my belief that consumer spending drives the rest of the economy, the news from the retail sector could not have been better. It simply dwarfed all other reports this week.
On the lighter side, Morningstar.com site editor Jason Stipp and I also posted a video last week on some of the less-obvious indicators of economic recovery, including sales of pick-up trucks.
Year-Over-Year Same-Store Sales Grow 8.7%
I erred in previous week’s article when I said there would be no economic news of note last week. More correctly, I didn't think that same-store sales reported by major retailers could jump nearly as high as they did. Retail Metric, an organization that totals up the monthly individual retailer sales reports, announced that same-store sales in March were up 8.7% from the prior year. Just a couple of weeks ago, the general thinking was that sales would come in at between 3% and 5%, a truly massive discrepancy. The number was also the largest monthly increase since Retail Metrics began collecting the data in 2000.
I believe the results are part of a continuing trend of improving consumer spending that began in early 2009, and really began to kick into high gear with the start of the holiday selling season in 2009. To give the bears their due, there was a perfect storm of good news in March, and the exceptionally strong results will be nearly impossible to duplicate in April. Weather was fantastic in some parts of the country, with temperatures more than 20 degrees above average. Easter came a week earlier in the year, pushing more sales into March, whereas last year the economy was approaching its nadir in March. Even stripping out these non-repeatable events, I believe the data is consistent with consumer spending growth well in excess of 3%. That should be more than enough to power overall GDP growth of 4.5% growth or more for the full year 2010.
April Sales Might Slow, But the Consumer Is Just Getting Going
While April retail sales are likely to look slow relative to March, I think the consumer is just now warming up. The psychologically important March jobs reports, showing six-digit job growth, could provide an important lift in consumer spending during the months ahead. The positive jobs report was announced after the March retail sales book was already closed. Stock market gains could also continue to fuel consumer spending during the months ahead.
Retail Sales Improvement Is Broad-Based
The March retail sales improvement was extremely broad-based, with improvement ranging from as high as 22.5% at Kohl's to a low of 5% at Costco. For a change, some luxury and clothing purveyors such as Nordstrom, American Eagle, and the previously mentioned Kohl's managed to beat value players like TJX Companies and Ross Stores, which have led the charts for months.
Sure, the naysayers pick at the earlier Easter and easy comparisons. Still, these factors didn't require a crystal ball, just a great rearview mirror to see last year's sales data, and a decent calendar. An early Easter and poor results last year don't really explain how very smart analysts (who own both rearview mirrors and calendars) were estimating March same-store sales growth of just 12% for Kohl's, which ended up posting growth in excess of 22%.
Stock analysts were not the only ones to miss this boat. The International Council of Shopping centers had been predicting same-store sales growth in March of 3%-4% on their website and mysteriously raised their forecast to 8%-10% on Tuesday of this week.
Real Estate Data Getting a Typical Spring Boost
The pending home sales report for February was also surprisingly strong, registering an increase of 8.2% versus expectations for flat sales. Sales that turn up in this report generally show up in the more influential existing home sales report a month or two later. Given the poor weather conditions in February, I was surprised by the magnitude of the gain. Our housing analyst, Eric Landry offered the following analysis:
Last week's pending homes report from the National Association of Realtors, which tracks contracts signed in the large markets, was quite strong. Overall contract activity increased 8.2% sequentially in February, after a 7.8% sequential drop in the prior month. The Midwest was the strongest region, with a 21.8% sequential gain. Both the Northeast and South posted roughly 9% sequential gains, while the West posted a 4.8% sequential decline. Pending sales, which generally lead existing sales by one to two months, indicate there's likely to be another spike in activity as buyers ramp up activity in anticipation of the expiration of the federal tax credit at the end of April. Investors should expect robust contract activity in March and April, followed by a lull in May and into the summer months.
Initial Unemployment Claims Gyrate Up One More Time
Of course after many weeks of ignoring the weekly gyrations in the initial unemployment claims, previous week I mentioned that maybe some of the extraneous variables--such as weather, holidays, and adequate personnel to process the claims--would finally make the numbers more dependable again in the near future. Then last week, the number of new claims jumped from 442,000 back up to 460,000. A state holiday in California and difficulties in calibrating adjustments for holidays that float to different weeks each year were part of the reason for the jump. In any case, the steadier average of four weeks of claims barely moved last week (up from 448,000 to 450,250 claims) and was well down from the 2009 high of 658,750.
After the first year or so of improvement in unemployment claims, improvement in this metric comes much slower. The slowing improvement in past recoveries has not been an indicator that the economy was about to dip back into a recession. In other words, initial unemployment claims lose some of their predictive power once we are well past the bottom and into the recovery.
ISM Non-Manufacturing Index Shows Signs of Life
While I usually stress the strength of the Institute of Supply Management Purchasing Managers’ Report for Manufacturers, the slower moving reports for non-manufacturers managed to show its third consecutive month of growth. I view this as strong corroborating evidence of the manufacturing index, which entered its growth mode in the middle of 2009.
Qualitatively, the report mentioned that new budget money to spend since the beginning of the year has been a big help in improving business. Inventories that were artificially low, and a new sense of general optimism, were other reasons cited for an improving report. The new orders component of the report, one of the most important components in my view, jumped to 62.3 during March from 55.0, boding well for the months ahead when those services are used and billed.
Both ISM manufacturing report a week ago and last week's non-manufacturing reports showed strong growth in the exports component. On the services side, this jumped from 47.0 to 57.5. Strength in the rest of the world economy and strong U.S. competitiveness are probably behind the recent display of strength. The import statistics weren't nearly as robust, potentially indicating that net exports could be another contributor to GDP growth during the first quarter.
Manufacturing Data Leads the Charge This Week
This week will bring a flood of additional manufacturing data, including industrial production and several regional purchasing manager reports for April, as well as inventories. Weather and various issues at Toyota slowed the growth of industrial production in February, but I expect a rebound of close to 1% in March.
Recall in my thesis that we have a lot of room for industrial growth ahead as end-user demand approaches pre-recession levels, while production has recovered just a third of its losses.
What Will Be Under the Covers of the Consumer Price Index Report?
The Consumer Price Index is also due. I expect muted overall growth of just 0.2%, with housing-related components keeping a lid on the index. More important than the top-line number is a determination of how many of the underlying components showed a meaningful increase. I still believe that inflation will accelerate in a meaningful way by the end of the year.
Housing Starts Better at Last?
With weather improving and the federal housing credit approaching expiration, I am expecting housing starts to look a little better in March. February starts were just 575,000 units. I'm expecting 620,000 or more starts in March. Recall that starts peaked at close to 2.2 million units and natural annual demand runs about 1.5 million units.
This is an edited version, The article originated from Robert Johnson’s column at Morningstar.com.
