Digging Into November’s Tepid Retail Sales Report

Retail sales missed expectations in November, rising just 0.3% m/m—far slower than the 0.8% rise analysts anticipated.^[i] In our view, there are a few potential reasons for the miss, which we will explore momentarily. But here is one deduction we don’t think the data support: that inflation is hurting consumer spending. Not because of anything unique to November’s report, but because of the simple fact that retail sales are but a slice of spending—and one that isn’t adjusted for inflation. (Nor would that explain big October retail sales amid similarly hot inflation readings.) We will all have to wait for November’s personal consumption expenditures report for more insight. In the meantime, though, let us look at some potential explanations for the disappointing results, which we think illustrate why investors shouldn’t lean too hard on backward-looking data.

First, high gasoline prices are doing what they normally do: pulling spending from discretionary categories. Higher gas prices can be frustrating, for consumers and retailers alike, but it also illustrates that gas prices aren’t an economic driver. Just as sales at gas stations are part of overall retail sales, spending on gas is part of overall consumer spending. Gas prices don’t detract from disposable income, which is the primary determinant of consumer spending. Rather, they just affect where that income goes. When gas prices fall, it frees up money for other purposes—saving, investing or spending on more fun things. When gas prices rise, it generally leads to people saving less or spending less on discretionary items and entertainment. That appears to have happened, at least to some extent, in November. Sales at gas stations rose 1.7% m/m, compounding October’s 3.7% rise, while sales everywhere else rose just 0.1%.^[ii] Excluding gasoline and food, sales fell -0.05%.^[iii]

That isn’t great, and it does suggest pricier essentials are robbing discretionary categories to some extent. But we also hesitate to read much into it, because there is a secondary explanation for weakness in discretionary categories: a funky holiday shopping season. October was quite strong for sales outside of food and gasoline, which rose 1.7% m/m.^[iv] Electronics and appliances (3.1%), department stores (2.5%) and online sales (4.1%) were all strong that month.^[v] But the first two reversed sharply in November, falling -4.6% m/m and -5.4%, respectively, while online sales flatlined.^[vi] One potential explanation, which we highlighted on Black Friday, is retailers’ starting holiday discounts in October, far ahead of the traditional season. Another is consumers’ pulling purchases forward due to supply chain worries. With headlines warning of empty shelves come Thanksgiving, getting an early start likely seemed to be a sensible option for many. 

In our view, these competing explanations show the dangers of trying to glean too much from any month’s economic data swings, whether that swing is higher or lower. No report is all-telling about the economy’s health. Sometimes data can disappoint for benign reasons. Sometimes “good” reports can be false positives. This is especially true of retail sales, which omit most services spending—a big problem, considering about two-thirds of US consumer spending is on services.^[vii] That omission make retail sales a bit more volatile, so each monthly read must be approached carefully.

Trends matter more, and those often don’t become apparent for several months, by which point stocks have probably long since moved on from whatever granular takeaways you glean in hindsight. So, whether you prefer the “gas prices bit” explanation, the “holiday shopping started early” narrative or some combination of the two, don’t draw big forward-looking conclusions. Stocks aren’t hung up on how consumers behaved in November. Rather, they are looking over the next 3 – 30 months and the likelihood of a growing economy and strong corporate earnings over that span. Nothing in November’s retail sales report suggests this changed on a dime, in our view.