Buy the Sky and Sell the Sky

JACKSON HOLE, Wyo. -- Solid February

retail sales

numbers alongside huge upward revisions to January figures yield a first-quarter consumption (and hence

gross domestic product

) picture materially stronger than most analysts were forecasting. Look for even the most diehard slowdown wing nuts to jack up their estimates of first-quarter growth.

  • Overall retail sales rose 0.9% in February; they rose 0.6% excluding autos. A month ago the government reported that retail sales rose 0.2% on both an overall and an ex-auto basis in January; those increases have been revised to 1.0% (overall) and 1.1% (excluding autos).
  • The revisions to the January data are so huge (even for this series) that they smack of tinkering. As such, the revisions to February jobs data to be released with the March employment report on April 2 assume heightened importance. Specifically, in the event that the February job gain is revised up materially, there is a good case to be made that someone was very concerned about the market impact of super-strong economic reports at a time when bonds looked terribly ugly. Think behind-the-scenes damage control like that is far-fetched? Don't be naive.
  • The retail sales numbers are reported only on a nominal basis; that is, they are not adjusted for inflation. The year-on-year increase in retail sales clocked in at 7.7% last month; this marks the second biggest retail sales growth rate in 25 months. Also note that retail sales were rising at an average 6.3% year-on-year rate during the fourth quarter; this growth rate accelerated to 6.6% during January and February.
  • Listen. Any slowdown type worth his salt will look you in the eye and tell you that nominal retail sales growth is decelerating. But it isn't. To say that nominal retail sales growth is decelerating is a lie; the slowdown types must lie in this way to justify their forecasts. Please keep that in mind. Right this minute, with February data in hand, nominal retail sales growth cannot even be truthfully described as flat. Nominal retail sales growth is accelerating; that is a fact.
  • Retail sales excluding building materials, gasoline and vehicles vaulted 6.1% during the fourth quarter; retail sales growth is on track to soar a whopping 9.6% during the first. As noted here yesterday, this stripped-down measure of retail sales is important because it goes directly into the personal consumption expenditure (or PCE) numbers, which in turn go directly into the gross domestic product numbers. (Government statisticians get sales data for building materials, gasoline, and vehicles from other sources.)
  • That 9.6% figure, along with a first-quarter service-spending increase that will clock in at least twice as big as the 1.7% fourth-quarter gain, will help to produce a first-quarter PCE increase upwards of 5.0%. (Also as noted yesterday, the retail sales report does not include spending for services; such spending accounts for 59% of all consumption.) Recall that PCE rose 4.5% during the fourth quarter, when GDP surged 6.1%.
  • A 5.0% PCE increase will prompt smart upward revisions to first-quarter GDP estimates; consumption will contribute more than three-and-a-half percentage points to the growth rate all by itself.

The slowdown types were predicting a first-quarter GDP increase in the 2% area --

even after eight weeks of the quarter had already passed

. So, when the first-quarter GDP numbers are released on April 30, those folks will look silly for the umpteenth straight quarter -- this time to the tune of at least two full percentage points.

As to the future?

The trend in first-time claims for

unemployment insurance

sits at its

lowest level in 10 years. (Claims history is available at



site under the "SESA UI Statistics" heading.) And it sits even lower when properly adjusting for the fact that, owing to an increasing number of employed persons in the economy, a 289K claims number does not mean the same thing it did even a few years ago (see

this recent column for specifics). Do not let the fact that the unemployment rate rose a tick last month fool you into thinking that the labor market is loosening; it isn't. Through the first week of March it was tight and getting tighter. There will be no material growth slowdown without a material consumption slowdown, and there will be no material consumption slowdown without a material employment slowdown. There was no sign of one through the first week of March.

Meantime the

ABC News/Money Magazine

consumer comfort index rose -- it hit an all-time high, again -- during the week ended March 7. The Buying Climate portion of the index rose to its highest level since early December.

Consumers are feeling no pain.

As has been the case for most of the past three years, the economy is stronger than most analysts and forecasters reckon. So too is the spending outlook.

Side Dish

Certainly ought to have included

George Lazenby

instead of


. All apologies.

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