Two Leading Economic Indicators Now Confuse as much as Clarify

Feb 27, 2015

The deep drop in the global price of oil is playing havoc with the ability of economists to interpret the latest statistical data.

2015 02 23 Foreign Trade Graphic

Two of the series that have been affected most are inflation and retail sales.

The central banks of the U.S. and Canada have year-over-year ‘core’ inflation targets of +2.0%.

The ‘core’ consumer price index (CPI) omits the most highly volatile items, mainly in the food and energy categories.

U.S. core inflation in January was +1.6% year over year according to the Bureau of Labor Statistics. North of the border, the comparable figure was +2.2% as reported by Statistics Canada.

Therefore, both countries weren’t terribly far off the +2.0% ‘core’ inflation targets adopted by both the Federal Reserve and the Bank of Canada.

‘All-items’ inflation, though – the measure with more day-to-day relevance for consumers, since we do all purchase food and energy – was quite another matter.

In the U.S., January’s year-over-year all-items inflation dipped slightly below zero to -0.1%, while in Canada it sat at a restrained +1.0%. 

It doesn’t take much sleuthing to discover the reasons for the overall pricing weakness. The U.S. energy sub-index in the latest month was -19.6% year over year and gasoline, a barely believable -35.4%. The Canadian equivalent measures were -12.9% and -26.9% respectively.

Canada’s less-negative performance has been on account of the fall in value of the ‘loonie’ (i.e., the nickname for the nation’s currency) versus the greenback.

Canada’s currency decline is making the price of many imports more expensive. South of the border, the pumped-up greenback is rendering imports cheaper.

The degree of the currency effect in each country is also being determined by the relative importance of foreign trade. Canada’s imports as a proportion of gross domestic product (GDP) are 26%. The imports-to-GDP ratio in the U.S. is a decidedly smaller 14%.

Aside from significantly lowering the U.S. and Canadian inflation rates, where does the enormous drop in energy prices (especially for gasoline) show up in a more practical sense?   

This is where the story begins to take on heightened gravitas.

We need look no further than retail sales. Consumer spending in the U.S. is 70% of GDP. In Canada, because foreign trade fills out a larger portion of the whole, it is 55%. That’s still more than half of national output.

As reported by the Census Bureau, U.S. total retail sales in January, in ‘current’ (i.e., not adjusted for inflation) dollars, were -0.8% month to month (seasonally adjusted) and +3.3% year over year.

In the latest period for Canada (i.e., December 2014), they were -2.0% month to month and +4.0% year over year. (Shopkeeper numbers for Canada are always a period or two behind the U.S.)

As a benchmark, economies are ticking along nicely when current-dollar retail sales are +5.0% year over year.   

If this were a mystery novel, we’d be asking whodunit. Who’s been holding back retail sales in both countries?  

Again, it’s only a short journey to discover the truth. The culprit leaps out from the headlines.

Revenue earned by gasoline stations in the U.S. in January was -9.3% month to month and -23.5% year over year. In December, Canadian service stations rang up sales of -7.4% month to month and -11.0% year over year.

The current-dollar sales declines were entirely due to the aforementioned price plummets. By volume (e.g., gallons or liters), drivers fueled up their chariots every bit as rapidly as before. 

For all other (i.e., non-gasoline) categories of retail sales, the year-over-year current-dollar sales gain for the U.S. in January was +6.6%. For Canada in December, it was +6.3%.

Those two percentage changes aren’t just rosy-cheeked, they’re glowing.

Critical analysis needs to be thorough in understanding and explaining the data.

So far, it appears that developments are proceeding as they should be – that the drop in oil prices will lead to more spending in other consumer-related areas.

Logic suggests ‘motor vehicle and parts dealers’ will be the retailer sub-category to benefit most from the new energy reality. Lower-priced gasoline should provide a spark for new car sales.

Except there’s a yellow caution flag. Automotive sales in both countries have been doing very well, thank you, over the past couple of years. Canada’s exceptionally strong 2014 unit-sales level set a new annual record.

The most recent year-over-year sales figure for ‘motor vehicle and parts dealers’ in the U.S. was +10.0%. At +10.9%, Canada’s performance was even better.

Does it seem likely that those large double-digit percentage increases can be improved upon in the months ahead? Should that happen, the already significant investment plans announced by carmakers and their suppliers may need to be augmented.

The other leading sub-category among U.S. retail sales in January was ‘food services and drinking places’, +11.3% year over year.

In Canada, the additional retail sub-sectors running ahead of the pack in December were ‘furniture stores’, +12.5% year over year, and ‘building material and garden equipment suppliers’, +11.3%. The strength embodied in those gains implies good news for the nation’s construction industry. (The latter’s tie-in to on-site worker activity is obvious. As for the former, furniture is often purchased for new structures.)   

The bottom line is that it has become trickier to interpret the results from some of the most widely-watched economic indicators.

Economists will earn their money – as if we haven’t been doing so already – trying to sort through the myriad meanings of the latest statistical missives.  

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