5 Reasons to Doubt September’s Resurgence in Retail Sales

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If you can feed a cold and starve a fever, can you spend away the threat of a double-dip recession? From Wall Street to Main Street, everyone is hoping the answer to that question is “yes.” And there was some good news to encourage those happy thoughts on Friday: A 3.6% jump in auto sales drove September retail spending to its strongest performance in seven months.

After virtually flat consumer spending in August, U.S. retail sales got off the schneid in September, rising 1.1% and beating the consensus forecast of 0.7% growth. Retail sales are a critically important measurement because consumer spending accounts for 70% of the gross domestic product — and they are one of the best indicators of the economy’s health.

The engine behind last month’s retail sales increase: the boom in vehicle sales. Automakers sold close to 1.1 million vehicles in September, the largest percentage gain in 18 months. Consumers also spent more on gasoline, auto parts, clothing, home furnishings and at bars and restaurants. Oddly, consumer spending was flat at grocery and liquor stores, as well as at sporting goods retailers and book and music stores.

But here are five reasons to take the September retail sales news with a grain of salt:

Pent-Up Demand Skewed the Numbers

Consumers drove more new cars off the lot in September, but that growth is more about pent-up vehicle demand than it is about rising consumer confidence. The March 11 earthquake, tsunami and nuclear disaster in Japan crippled the tightly choreographed auto supply chain, resulting in production delays for many popular models. While auto parts shortages merely slowed production at Detroit Three automakers Ford (NYSE:F), General Motors (NYSE:GM) and Chrysler, Toyota (NYSE:TM) and Honda (NYSE:HMC) were hammered. But since TM and HMC returned to full production last month, inventory levels have risen significantly, giving dealers more vehicles to sell.

Consumer Sentiment Is Slipping

Consumer confidence slipped to 57.5 in October from 59.4 in September, according to a Thomson Reuters/University of Michigan index released Friday. An even greater concern: Consumer expectations about the state of the economy six months from now dropped to 47 — their lowest level since 1980. That last statistic is a key measurement because it projects spending trends that are likely to manifest in lower retail sales in 2012.

Inflation Is Rising

The price of U.S. imports unexpectedly jumped 0.3% in September, the Labor Department said Friday. Economists had expected prices to fall by 0.4% to 0.5%. This unwelcome news indicates that rising inflation is a clear and present danger for the U.S. economy.

Unemployment Remains High

The good news: Last week, new applications for unemployment benefits slipped by 1,000 to 404,000 and the total number of people collecting jobless benefits dropped by 55,000 to 3.67 million. The bad news: The number of people who have used up their benefits or who are now collecting extended or emergency benefits increased by 2,300 to 3.55 million. The full story: There are 14 million out-of-work Americans, and the country’s unemployment rate is stubbornly stuck at 9.1%.

Foreclosures Are Rising Again

To further exacerbate the economy’s challenges, foreclosures are increasing. Between July and September, the number of homeowners who received a first-time mortgage default notice rose by 14%. That reverses five consecutive quarters of declining defaults and might be the harbinger of a new wave of foreclosures next year.

Bottom Line

Despite the rosier-than-expected retail sales in September, the economy is not out of the woods yet. While consumer-spending growth is the quickest way to bandage up an ailing economy, real recovery will require a lot more than a first-aid kit. And finding the way — and the will — to shift budget priorities and tax policies in an election year could be about as easy as performing open-heart surgery with rolling pin.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/5-reasons-to-doubt-septembers-resurgence-in-retail-sales/.

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