Retail Sales: No Reason to Celebrate

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Shannon Stapleton / Reuters

Americans bought less stuff in May, but more than most people thought. That’s left markets perky, but we’re not in the clear yet.

The Commerce Department reported U.S. retail sales fell last month by 0.2%, their first drop in almost a year after ticking up 0.3% in April. The good news is the drop wasn’t as bad as economists predicted, and much of the decline can be tied to the Japanese quake. Auto sales were the prime culprit, falling 2.9% because of the choke in Japanese parts. But if you think that means the consumer funk will be short-lived, here are some reasons not to hold your breath:

May’s retail numbers are worse than they look. Gas prices eased but were still high, which cut further into retail spending than headlines let on. When you take out gas receipts, retail sales fell by 0.3%, which is closer to what gloomy analysts were predicting (a 0.4% drop).

Easing inflation numbers out today are also misleading, since the measure doesn’t gauge what consumers are actually feeling. The producer price index, which accounts for changing prices of a lot of goods and services sold, slowed to a 0.2% bump in May after a bigger 0.8% gain in April, thanks to easing gas and food prices. That had investors cheering, since it means consumers could soon get a break. But the PPI doesn’t account for housing costs, which may be what’s hurting consumers the most.

As housing prices have continued to fall, so have American appetites for homebuying. More Americans are opting to rent, which is pushing up rental prices around the country. Housing now accounts for 40% of the consumer price index, another important inflation gauge, excluding food and energy. And the CPI is on the rise. Housing accounted for nearly a quarter of the 1.3 percentage point rise in the index in April, and unlike food and gas prices, there’s no sign of it turning back. Many economists think rental prices relative to home prices will reach their highest level in decades this year and could continue rising for years to come. Already U.S. apartment rents have risen 5% in the past year. That’s spells bad news for U.S. retailers if wages and jobs don’t start to head up.

Meanwhile, the easing producer price index has investors salivating at the thought of another round of Fed stimulus, aka QE3.  And that would only make things worse. Fed chair Ben Bernanke didn’t offer any hint of heading down that road in his Atlanta speech last Tuesday, but he didn’t rule it out either.

As I said last week, QE2 hasn’t done squat for most American households. The mass purchase of Treasuries was meant to create a “wealth effect” by boosting stock prices and home values. As for stock prices, they rose as hoped, as investors piled into higher-yielding assets to jolt their returns. That made traders and big businesses happy by boosting corporate profits as stock prices went up. But it hasn’t translated into more household wealth or consumer spending, since cash-flush businesses still aren’t willing to hire. Meanwhile, the rush into equities included a head-long dive into commodities, which left Americans — squeezed by rising gas and grocery bills — with little room to buy other stuff.

The Fed’s June 21 meeting will offer the next set of clues for what’s to come. Here’s hoping the term “QE3” doesn’t rear its ugly head.