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Retail sales bears are at risk of making the same mistake that railroad volume bulls made in 2014.
In 2014, the bullish view was that railroad volume was surging. This supported bulls' views that overall economic activity in the US was also surging.
A small dig below the surface revealed an inconvenient truth: much of the growth was being driven by only one sector - petroleum and chemicals. If that was excluded, railroad volume was growing much less quickly (data from Yardeni).
With the drop in oil prices and the flattening in petroleum shipments, overall railroad activity is now flat y-o-y so far in 2015 (read here).
In the same way as railroad volume was misleadingly strong in 2014, retail sales is misleadingly soft in 2015.
Today's retail sales data showed a 0.05% y-o-y decline in nominal retail sales. On the surface, this looks like something that only happens in a recessionary economy (shading).
But the biggest culprit in weakening retail sales is energy. Average gas prices are about half of what they were a year ago. Not surprisingly then, retail sales at gasoline stations fell 22% y-o-y. In fact they have been at this low level each of the last 4 months.
So what do retail sales look like without the affect of lower gasoline station sales?
On a y-o-y basis, sales are 3% higher than in 2014. To be sure, this is not strong growth, but it is far from being exceptional. Annual growth has been at this level, or much lower, many times outside of recessions in the past 20 years (arrows). Recall as well that retail sales growth (ex-gas) in January - just 3 months ago - was almost 7%, nearly the highest since 2006 (8 years ago).
A year ago, rail volume gave a misleadingly strong view of the economy. Now, plunging oil prices are giving a misleadingly weak view of the economy. It's unglamorous, but reality lies in-between. The US economy is expanding - it's not recessionary - at modest pace. When the y-o-y comparable prices of oil even out later in 2015 and into 2016, this will be reflected in overall retail sales.
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