Retail Sales Get Stimulated

Retail sales in May benefited from the distribution of economic stimulus rebate checks.

Wall Street Greek told you in our week ahead article that economic stimulus was clearly well-timed, arriving just when retailers needed it most. So, today when May's Retail Sales were reported, nobody should have been surprised to see they had improved by 1.0% over April and 2.5% over last year. Even so, the broad-based increase across nearly all sectors of retail trade far exceeded consensus expectations for a 0.5% month-to-month change, and thus offered the stock market reason to look upward.

In that week ahead piece "The Greek" presciently wrote, "May Retail Sales will be reported as well, but we believe this data will benefit from the timely distribution of economic stimulus rebate checks. Economists agree, as consensus sees a 0.5% rise in May, versus a 0.2% decrease in April. Excluding automobiles, economists are looking for a 0.7% rise, and we think you could get an even better result. However, the headline figure might see a severe hit from durables, including auto sales; look for that in June for sure. The stimulus rebates have offered a boost in the arm at just the right time for it, but the question remains to be answered, what happens when that money is gone..."

Excluding autos, sales rose 1.2%, much stronger than the forecast but not exactly representative of the "severe hit" we had called for in autos. However, we continue to look for that in June. Big purchases are going to continue limited while loans are harder to come by and Americans are cash strapped. Also, hybrid and smaller vehicles are wonderful, but with unemployment increasing, this long-term improvement should not translate into substantial short-term sales for automakers Ford (NYSE: F) and General Motors (NYSE: GM). We want to be clear though that we like the impact of the cost crisis for as far as they drive structural improvements taking place in Detroit. When economic recovery does occur, barring Armageddon, GM and Ford should be well positioned to leverage over costs and grow earnings rapidly. Still, the displacement of autoworkers is not something we like to see, and it's partly our government's obligation to find or create new opportunity for these folks.

The Role of Gas Prices

Gasoline station sales rose some 13.8% over last year and 2.6% over last month. Gee, I wonder why... Well, it was not because of heavy motor vehicle traffic, as trader Steve Koufakis reminded "The Greek" last night at a Manhattan event. Recall, this Memorial Day holiday proved one well off historic motor vehicle traffic patterns. However, this segment (gasoline stations) gave little boost to the overall growth figure, since price change is adjusted out of the measure. Thus, there really is good reason to be hopeful, but hope alone does not an economic recovery make.

We expect the economy will continue to benefit from stimulus distribution through July, when the final checks are mailed. August might still see some residual benefit as well, and then the questions remains, can organic or natural economic growth resume or will inflation burden Americans enough to lead us into recession anyway. So, stagflation finds its way back into the American economic lexicon, as we predicted it would more than a year ago.

Election Year Generosity Abounds

In that eventuality, we expect the government will not have spent its entire arsenal of generous ideas, this still being an election year and all... Both parties want to present as the party for economic recovery. So, by then Congress and the President may have devised yet another capital infusion for Americans, and God bless them for it.

Recent statements in this regard by President Bush actually made sense to us. We are referring to his logical argument about the best place for American dollars being in the pockets of Americans, and that the returning of money through permanent tax cuts made sense. However, we also agree with the Democrats that money being spent on the salvation of Iraq might prove more useful back here at home these days. We have limited resources, after all, so we must prioritize.

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