What the Retail Sales Bump Says About the Economy

When is economic news good and when is it bad? Take the retail sales numbers from January 2023, for example — as much an example of the ping-pong nature of today’s economy, with sideline judges differing in interpretation.

For retailers, it was good news, with a 3% increase between December 2022 and January 2023. Although that has to be taken with some skepticism, because the 90% confidence interval includes zero, so the Census Bureau can’t know if there was any actual change.

But say that it was actually 3%. While retailers might be happy, especially after the -1.1% from November to December 2022, others, like the Federal Reserve, might not be, taking the activity as yet another example of an overheating economy, fueling the inclination to keep pressure on interest rates.

Although that is conjecture, as it’s become impossible to know exactly what the Fed will do, as it says it needs “a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Macro economist Claudia Sahm, who used to work at the Fed, wrote, “My knowledge of how Fed staff interprets data and forecasts gives me an advantage, but even I am baffled by some of their current messaging.”

The case she referred to was that phrase “sufficiently restrictive.”

“What does ‘sufficiently restrictive’ mean?” Sahm wrote. “The Fed’s definition will influence how many workers have jobs and how long inflation remains high. It’s not enough for Fed officials to tell us what the so-called terminal rate—the peak federal funds rate—might be. Tell us why. Define ‘sufficiently restrictive’ in plain English.”

That explanation is as unlikely to come as a Fed-provided translation of Alan Greenspan’s opaque reports to Congress ever did. A clear statement would almost by necessity require a degree of simplification and certainty that don’t actually exist.

So, since, at least in CRE, lobbying is unlikely to convince the Fed to modification its strategy for convenience’s sake, it’s left to try seeing where things are, especially with consumers. The jobs numbers for January at 517,000, pushing unemployment down to 3.4%, were much higher than expected.

However, that is the so-called U-3 measure. At the same time, the U-6 measure, which includes “unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force,” and which is arguably a more accurate measure of people out of work, went from 6.5% to 6.6%. There was effectively a shift of people out of the categories that are typically counted, but who may still be out of work.

Personal levels of debt have been rising as the extra money many received from pandemic rescue funds is depleted. The level of personal debt from credit cards and other commercial bank revolving credit plans, as of February 1, 2023, was at an all-time record of $949.9 billion, according to data from the Federal Reserve. The number had dropped by more than $100 billion during the pandemic. It’s up more than $200 billion since the pandemic low point.

The Wall Street Journal recently reported that more people are using their 401(k) savings to manage financial emergencies.

So, retail sales were up — and that number is seasonally adjusted, so not the raw data, and not adjusted for price changes, meaning inflation will make them look higher. But, as Oxford Economics said in a note, “Retail sales jumped in January, however a sustained turnaround is unlikely. While it may take time for spending to soften, we anticipate that cooling job and wage growth alongside stubborn inflation will drag down consumers’ willingness to spend. Excess savings will provide a fillip to growth, but only in the near term as most households will soon deplete their buffers. We continue to expect a recession later this year.”

There are some good reasons to be concerned about consumers in the long run. And that also means the potential negative impact on virtually all aspects of CRE.