Getting a fix on the situation in retail has been difficult of late. The monthly (nominal) retail trade survey has never been particularly good, and it seems to have been busted by the noise of the floods etc in Q1.
I think that a better picture of what’s going on can be had from the large retailer sub-sample (the Completely Enumerated sector). This sector showed real growth of ~1%q/q in Q1, which seems more consistent with the gain in retail jobs, and my assessment of the overall tenor of recent data.
There has lately been some disagreement where there ought not be — between company reports, the monthly and quarterly retail trade surveys (ABS 8501), the quarterly Business Indicators (ABS 5676), and quarterly employment in the retail sector (ABS 6291). I have put the level of the three (normalised in Q3’06) above, and the growth below.
Given the strength of employment growth, I have had a hard time swallowing the retail doom and gloom – especially as the sector is typically quick to cut jobs in a downturn (witness Q4’07). A possible explanation is that they had cut things too hard and are now playing catchup – however if this is the case, we should not be too worried about job losses if retail is indeed flat for a quarter or so.
So what does the data show? In Q1 the ABS estimated that nominal spending grew around 0.8%q/q (Ave since 2002 is 1.3%q/q nominal growth). This was decent nominal spending growth, but lousy real growth (~0.0%q/q).
The reasons real spending was weak are well understood, and they are unlikely to remain a headwind — the drop in real spending was partly because the food price deflator rose 1.5%q/q and partly due to the ‘fuel tax’ (fuel is not in the Aussie retail survey, however the increase in petrol prices would also have sapped spending power).
This does not solve the puzzle between the increase in employment and the weakness in real retail, however I think the answer is that the monthly retail trade survey has a few bugs in it.
We can separate the retail trade survey into the Completely Enumerated sector (a population measure of large retailers) and a sample of the rest. Re-weighting the implicit price deflators, to reflect the different sales mix of the larger CE retailers and the smaller sampled retailers, we can then look at what we know for sure (the CE sector) and what we’re just guessing about (the sample).
Nominal spending growth in the CE retail sector was 1.8%q/q in Q1, and price inflation was around 0.8%q/q, leaving us with a 1%q/q real increase in retail spending. This seems more consistent with the employment data. In the sample, we find that nominal spending fell by 0.8%q/q, with real spending down 1.3%q/q, thanks to a +0.5%q/q increase in retail price inflation.
I find the divergence in sample and CE sales a little hard to make sense of, and think that the CE data also comports better with my assessment of the broader economy – in particular it better fits the ongoing down-trend in the unemployment rate, and increase in job advertisements.
Thus, I conclude that the recent ‘weakness’ in retail sales probably has been overstated. Even if it hasn’t been overstated, wage gains and jobs growth appears to have been sustained, and the subtraction in spending power from the food and fuel tax will at least end, and probably (partially) reverse.