What the Surprise Retail Sales Drop Is Telling Markets
It’s the last thing the global economy needs right now: evidence that the U.S., too, is slowing.
And yet the latest retail sales data point in exactly that direction. Sales at retail and food-service establishments dropped 0.5 percent in June from the prior month, the Commerce Department said, in contrast to the 0.2 percent gain that was expected.
That in turn has prompted a fresh wave of downgrades to already-lowered growth expectations for the second quarter. Pierpont Securities economist Stephen Stanley, for one, took his tracking estimate to just 0.6 percent after the report (combined with a somewhat firmer read on May business inventories).
“I am running out of room with regard to being above zero!”, he wrote in a note to clients.
To be sure, Stanley is among the more bearish of economists on second-quarter growth; the latest consensus estimate was tracking closer to 1.5 percent prior to the report. Still, Deutsche Bank economist Joseph LaVorgna, whose growth outlook has long been more sanguine, lowered his own forecast for second-quarter growth to 1 percent from 1.4 percent after the report.
And Stanley isn’t the only one sending up the caution flares. CRT Capital strategist David Ader points out that a three-month stretch without retail sales growth is “quite rare to start with” and in the case of core retail sales, which exclude auto and gasoline sales, such a string is historically “consistent with the onset of recession.”
To be sure, very few economists or professional forecasters presently expect an imminent recession in the U.S. The notable exception is the Economic Cycle Research Institute, although its recession call dates back to last year. Given the weak batch of data, however, it’s possible that more outright recession calls are on the way, not least because of the additional growth drag that the so-called “fiscal cliff” is likely to present in early 2013.
Two countervailing factors, though, offer themselves up for consideration: one, that any recessionary jitters are likely to provoke more aggressive stimulus from the Federal Reserve; for this reason, the testimony Fed chair Ben Bernanke will deliver to Congress on Tuesday and Wednesday this week takes on additional import.
After all, the Fed’s “operation twist” easing program combined with the bond-buying scheme from the European Central Bank may have helped to stave off, or at least delay, recession in the U.S. and Europe at the turn of the year.
Secondly, it is precisely when the data turns weakest, and economists throw in the towel, that growth tends to start surprising on the upside. This factor may be more relevant for equity investors, however, especially if stocks have already priced in weak or no growth in the second quarter and only if the economy soon begins to show more strength.
More broadly speaking, the bond market has also been flashing yellow, if not red. The 10-year U.S. Treasury yield has sunk below 1.5 percent; a year ago it was nearly 3 percent. It is no accident that U.S. economic growth has followed this rate path lower, given that it reflects the risk attitudes of the world’s biggest financial market participants.
Even more sobering perhaps is that yields on two-year debt in Germany, Denmark and the Netherlands have now turned decidedly negative, as Europe’s own crisis deepens. The world’s biggest economies will need all the help they can get to keep growing; neither policy makers at home, nor emerging markets abroad, currently seem capable of providing that help, however.
-By CNBC's Kelly Evans