Friday’s Economic Good News Sendoff: Retail Sales Took Off in July

Normally, I wouldn’t highlight a one-month report. But this one deserves attention (link is to actual Census Bureau report, before the business press gets its spinning hands on it), because it basically blows the “slowing economy” meme out of the water:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $367.9 billion, an increase of 1.4 percent (±0.7%) from the previous month and up 4.8 percent (±0.8%) from July 2005. Total sales for the May through July 2006 period were up 5.9 percent (±0.3%) from the same period a year ago. The May to June 2006 percent change was revised from -0.1 percent (±0.7%)* to -0.4 percent (± 0.2%).

Retail trade sales were up 1.5 percent (±0.7%) from June and were 4.5 percent (±0.8%) above last year. Gasoline stations were up 19.2 percent (±2.0%) from July 2005 and sales of nonstore retailers were up 15.6 percent (±4.5%) from last year.

The report ignores inflation. After taking a month of inflation away, we’re left with a very impressive REAL increase (before subsequent revisions to come, of course) of just over 1% — in one month.

So of course the “yeah, but” reaction (link requires free registration) is that inflation is on the march, and that it’s only a one-month blip:

“Any sign that the U.S. economy is more robust than expected will, of course, bring the [Federal Reserve] back into play,” said Stu Hoffman, chief economist for PNC.

Other economists, however, said the longer forecast looks for weaker consumer spending. “Retailing is holding up quite well, but we expect a sustained slowing over the next few months,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

The inflation concern is real, but it’s because of what the Fed isn’t doing, not because retail sales had a one-month spike (see update below). As to the predicted “sustained slowing,” my reaction is: Blip, schmip. Normally, unless sales have been very volatile, the more important numbers to focus on, and which are usually not reported, are the year-over-year number for quarterly overall sales, monthly overall retail sales, and monthly retail trade sales, which in July’s case above are 5.9%, 4.8% and 4.5%, respectively. All of those key percentages are well above inflation, which means that real growth in retail sales has been taking place over a sustained period. There’s no reason (yet) to think it won’t continue.
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UPDATE: I said “good news,” not “Pollyanna News” — Don Luskin’s Smart Money column today correctly criticizes Fed Chairman Ben Bernanke for NOT raising interest rates on Tuesday. Luskin believes that harsh tightening to prevent inflation will inevitably be required because of failure to apply the brakes gently now, and he genuinely fears a recession. I would argue that Bernanke has time to make up for Tuesday’s omission. The markets’ reaction to the non-hike should sober Ben up bigtime. I’d be surprised if the Fed doesn’t raise rates at least two more times before the end of the year. In fact, I wouldn’t rule out a half-point kick in the pants, instead of the normal quarter-point, to get everyone’s attention.