Friday, March 16, 2007

Retail Sales and Q1 GDP

by Bill McBride on 3/16/2007 04:40:00 PM

Update: for a review of inflation, see Macroblog: The Inflation Report: Just Not Getting Better

With the release of the inflation report this morning, we can start to estimate the real growth of consumer spending on goods (durable and nondurable) in Q1, and the contribution of retail spending to Q1 real GDP growth. This estimate is based on data for the first two months of the quarter, and could change significantly with the March data.

Retail Sales vs. Personal Good Consumption and RecessionsClick on graph for larger image.

This first graph shows the YoY change in nominal retail sales (from the Census Bureau) vs. the change in nominal personal consumption spending on goods (from the BEA).

The two series track very well, especially over the last ten years. This shouldn't be a big surprise since the BEA has started using the Census Bureau data to estimate spending on goods. (See Note 6: Key source data and assumptions for "advance" estimates - excel file)

Note that Q1 2007 was based on the first two months of the quarter.

Year over Year Real Change in Retail SalesThe second graph shows the YoY change in real retail sales (using CPI to adjust). This clearly shows the slowdown in retail spending (in real terms).

Now something unusual happened in Q4 2006 (and it was not widely reported). The increase in real PCE was greater than the increase in nominal PCE for the first time in about 50 years (as predicted here). This simply means that PCE prices declined in Q4.

So even though nominal spending on goods declined in Q4, the BEA reported that real spending on durable goods increased 4.4% annualized, and nondurable goods spending increased 6.0% annualized. This contributed 1.54% to Q4 GDP (out of 2.2% real annual growth). Because of the unusual decline in prices, this adjustment will probably not be repeated in Q1 2007.

Right now it looks like nominal consumer spending on goods will increase about 4% (annualized) in Q1, or about 1.0% to 1.5% (annualized) in real terms. This means consumer spending on goods will probably only contribute 0.4% or less to GDP in Q1. Those looking for 2.0% or higher GDP in Q1 will probably have to look elsewhere (or hope for a blowout March). Of course this doesn't include spending on services - about 60% of all personal consumption expenditures.