U.S. Retail Sales Surged As Temperatures Warmed

January US retail sales surged 2.3% as temperatures posted record highs. The increase by far exceeded Consensus expectations for a 0.8% gain and the December increase was revised down to 0.4% due to a lowered estimate of auto sales.

Unseasonably warm temperatures in the U.S. last month were evident in the record low number (662) of heating degree days which were down 22% from the warm January 2005.

Sales by motor vehicle & parts dealers rose 2.9% (4.9% y/y) and the increase about matched the 2.7% m/m rise in unit auto sales.

Discretionary spending surged as consumers went shopping. Apparel store sales jumped 4.2% (10.0% y/y) following marginal declines during the prior two months. General merchandise store sales surged 2.1% (7.4% y/y) after no change in December and sales of furniture, electronics & appliances recovered 2.9% (7.9% y/y) after a downwardly revised 1.0% December decline.

Building material sales certainly benefited from the mild weather and jumped 3.4% (14.7% y/y).

Sales at gasoline stations rebounded following three consecutive months of decline. The 5.5% rise, however, lagged the 6.0% m/m recovery in gasoline prices. In February, gasoline prices have averaged about the same level as during January.

Less gasoline, nonauto retail sales spiked 1.8% (8.3% y/y) and the December increase was revised up to 0.3%.

Sales of nonstore retailers (internet & catalogue) dropped 2.6% (8.3% y/y).

Total business inventories posted another solid increase during December. The 0.7% increase followed an upwardly revised 0.6% November gain and was firmer than the 0.4% Consensus expectation.

The latest increases, however, have lagged the firm growth in business sales. As a result the ratio of inventories-to-sales fell back to the postwar low of 1.25.

Retail inventories gained 0.7% after an upwardly revised 1.0% November rise. A 0.9% rise in motor vehicle inventories was the fifth in as many months but auto inventories still fell 0.6% y/y. Retail inventories less autos rose 0.6% as furniture inventories increased 0.8% (3.5% y/y). Apparel inventories also rose a firm 0.6% (5.2$ % y/y) and general merchandise inventories posted a 0.6% (4.6% y/y) gain.

Wholesale inventories jumped 1.0% as imports on nonpetroleum goods jumped 3.4% (8.1% y/y). During the last ten years there has been a 67% correlation between the y/y change in wholesale inventories and the change in imports of nonpetroleum goods.

Factory sector inventories added to the prior month's gain and rose 0.5%.

The January index of small business optimism from the National Federation of Independent Business (NFIB) reversed the small December rise and fell 0.3%. The latest index level was 6.1% lower than the peak during November 2004.

The latest m/m decline reflected fewer firms (6%) firms expecting the expecting the economy to improve, down from a high 51% during late 2003, although the percentage with one or more job openings jumped to the highest level (26%) since 2001.

During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.

The percentage of firms planning to raise average selling prices rose to 29% from 27% during all of last year but the percentage of firms actually raising average selling prices was stable at 18%, down from a 22% average during 2005. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.

About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.

The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

According to flash estimates published today, growth in real gross domestic product of the twenty-five countries of the European Union slowed to 0.4% in the fourth quarter of 2005, down from a 0.6% increase in the third quarter. Growth in the Euro Zone, alone, was 0.3%, down from a 0.6% increase in the third quarter. Incidentally, the slowdowns in the fourth quarter in the Euro Zone and in the EU were less marked than that of the United States, where fourth quarter growth fell to 0.3% from 1.0% in the third quarter. As a result, growth in the Euro Zone equaled the 0.3% quarter-to-quarter growth of the U. S., and growth in the European Union was greater than that of the U.S. for the first time since comparable data on the Euro Zone and EU have been available. The first chart compares the quarter-to-quarter growth rates in GDP in the U.S. and the Euro Zone.

Within the Euro Zone there was a marked slowdown in Germany, from 0.6% growth in the third quarter to practically zero in the fourth. Growth in France also decelerated from 0.7% in the third quarter to 0.2% in the fourth. There were, however, countries where growth picked up in the fourth quarter--Spain and Austria among them.

In spite of the fourth quarter slowdown, the institutional investors and analysts of the ZEW survey remain confident that conditions will improve over the next six months. In Germany, the balance of those expecting improvement over those expecting a worsening was 69.8% in February, very little changed from the 71% in January. As recently as May, 2005, the balance of optimists was only 13.9%. The second chart plots the balance of the optimists over the pessimists with the quarterly change in real GDP for Germany. A similar picture is shown in the third chart for the Euro Zone as a whole. The balance of optimists over pessimists was 66.0% in February, virtually identical with January's 66.1% and well above the May 2005 low point of 14.8%.