There may be trouble ahead

In the wake of tentative moves toward monetary tightening by the Fed and the Bank of Canada, and with interest rates still way below either historical norms or neutral levels, growing fears of recession or stagflation seem exaggerated.  Still, it's worth looking at the ongoing data flow to see if there are any signs that the doomsters may turn out to be right. Today's release of new retail sales data from Statistics Canada is a good place to start, especially as it offers lessons in the importance of not reading too much into the headline number. 

That headline number certainly looks weak: according to StatsCan, "retail sales were virtually unchanged" in March -- and note, by the way, that this is already a dated report, this being the last week of May. The figure released today is certainly below StatsCan's preliminary estimate, which had called for a rise of more than 1 percent. However, as soon as you move on to the second sentence of the press release, things start to look rather less clear: "Sales were up in ten of eleven subsectors"!

That's right. All of the weakness in the headline figure came down to a 6.4 percent decline in sales at motor vehicles and parts dealers. The remaining ten subsectors, which account for 75 percent of overall retail sales, all posted gains in the month, led by a 7.4 percent increase in gasoline sales. Using StatsCan's definition, which excludes gasoline and vehicle dealers, core retail sales actually rose 1.5 percent in the month. 

There is, naturally, a further complication. All the numbers quoted so far are in nominal terms. Given the well-publicized surge in inflation, we would expect real (i.e. inflation-adjusted) retail sales to present a different picture. That is indeed the case: retail sales in volume terms fell 1 percent in the month* . For the first quarter as a whole, the volume of retail sales rose only 0.2 percent, even as the nominal value of sales rose 3.0 percent, the fastest pace seen in more than a year. 

In keeping with its recent practice, StatsCan is offering its preliminary estimate of retail sales for April: a 0.8 percent gain in nominal terms.  The vertiginous rise in gasoline prices stalled or even slightly reversed in April, so this nominal increase may correspond to a small increase in the volume of sales for the month.  Given the importance of retail trade to the overall economy, a prolonged decline would have very serious implications. For the moment it remains too early to predict that. The situation bears close scrutiny, but releases like today's will not deter the Bank of Canada from continuing its policy tightening. 

* One area of strength: cannabis stores, up 11 percent in volume terms in the month and up more than 30 percent from a year ago!