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A Hugely Important Upturn In Retail Sales

Thursday, 12 Mar 2009 | 4:43 PM ET

Doom-and-gloom crowd take notice: Today’s retail-sales report showed far more strength than Wall Street economists dreamed possible.

Overall, February was down slightly, but January was revised up to a 1.8 percent gain. Excluding autos, February was up 0.7 percent and January was up 1.6 percent. In terms of core retail sales (ex autos, gas, and building materials), which feed into the GDP reports, February was up 0.5 percent and January was up 1.7 percent.

In fact, consumer spending in first-quarter GDP could turn positive. Overall, GDP will be down because of a massive inventory liquidation, but the sooner that draw-down is complete the faster we’ll get positive GDP growth — maybe even in Q2.

Meanwhile, the retail-sales upturn is hugely important. I suspect two factors are at work.

First is the energy tax-cut plunge — most especially with retail gas prices going from over $4 to under $2 since last summer. This means the existing level of personal income is worth more to consumers in terms of buying power because of zero inflation and the energy tax cut, which probably amounts to $400 billion annually.

Second is the rapid buildup of the M2 money supply over the past six months. M2 is growing at a double-digit annual rate, following on the Fed’s big liquidity expansion of its balance sheet. With commodities in the open market now stabilizing, the turnover of money (velocity) is also probably stabilizing, and M2 will be a huge economic stimulant in the months ahead.

In other words, even before one dime of the Obama spending package goes into play, the economy is beginning to show the first signs of recovery.

Stocks, by the way, are up 240 points at this writing — their third-straight daily rise on the shoulders of new banking profit reports and today’s positive retail-sales numbers.

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  • Lawrence Kudlow is a CNBC senior contributor. Previously, Kudlow was anchor of CNBC's prime-time program "The Kudlow Report"