Weekly Market Commentary 6-20-2011
Nothing is Exactly as it Appears
Weekly Market Commentary 6-20-11
Tim Phillips, CEO – Phillips and Company
According to the advance monthly sales for retail and food services released last week by the US Census Bureau, retail sales declined 0.2% in May (seasonal adjusted). While the headline suggests slowing sales, some things may not be exactly as they appear.
First, looking passed the headline number and on to a breakdown of the number calculation, it’s clear 16.83% of the adjusted total is derived from motor vehicle & parts dealers. This represents the biggest component of the monthly sales number.
Secondly, on the third page of the press release the percentage change is broken down for each section of the total retail sales headline number. The section with the highest percentage drop from April to May was motor vehicle & parts dealers at -2.9%, followed by electronics & appliances stores at -1.3%.
This means May’s biggest drop in month over month sales came in the biggest section of the headline number. When excluding motor vehicle & parts dealers sales numbers, the headline retail number goes from -0.24% to 0.32%, a difference of 56 bps. Is this divergence between “motor vehicle & parts dealers” and “total retail sales excluding motor vehicle & parts dealers” an early indicator of a decline in consumption?
One way to measure demand for big ticket items (like automobiles) is to look at the change in non-revolving credit, also known as installment credit. According to the Federal Reserve’s most recent consumer credit report released June 7, 2011, non-revolving credit increased at an annual rate of 5.25% in April and 6.0% in the first quarter of 2011. Based on this data, consumers are buying and banks are lending and it doesn’t appear to be an issue with demand.
What about the other side of the economic coin? Supply
Since the March 11 earthquake and tsunami hit Japan, Japanese auto makers have taken a big hit and investors are just now beginning to see the effect. For the month of April: Nissan, Honda, and Toyota sales fell by 9.1%, 22.5% and 33.4%, respectively. While the earthquake and tsunami happened in mid-March, it seems apparent that the supply chain for automobile manufacturing and exporting in Japan will take a few months to fully recover.
Nothing is exactly as it appears. A headline number first appearing to indicate a potential slowdown in consumption and demand, turns out could actually be a result from a temporary supply chain disruption. This also supports the potential future outcome #2 discussed at the beginning of the month.
As always, we appreciate all the feedback we get. Please send your thoughts and comments tphillips@phillipsandco.com
Tim Phillips, CEO – Phillips and Company
Primary research done by Adam Gulledge, Associate – Phillips and Company
Twitter: @PHCOAdvisors