Monday, October 17, 2011

Profits & Retail Sales

It’s too soon to tell whether the Q3 earnings season will be full of positive or negative surprises. Last week, Alcoa and JP Morgan disappointed, while Google beat expectations. I expect more disappointments in Materials and Financials. However, there should be plenty of beats among Retailers, Industrials, and IT.

One ominous development is that on Friday, the US Treasury reported that corporate tax receipts were down 5.4% y/y in the 12 months through September. The growth rate is highly correlated with the comparable figure for the S&P 500 quarterly earnings, and is the weakest since May 2010. It’s possible that the weakness in corporate tax receipts is related to the strength in capital goods orders in recent months. Corporations may be rushing to take advantage of the 100% depreciation allowance that expires at the end of the year.

When Americans get depressed, they go shopping! How else can we explain why retail sales rose 1.1% during September, while the Consumer Sentiment Index (CSI) was near previous record low readings at 59.4 during the month, and fell to 57.5 during the first half of October? In addition, August’s retail sales were revised upwards to 0.3% from flat, and July’s figure was nudged up from 0.3% to 0.4%. That happened even though the CSI expectations component fell in early October to 47.0, the lowest reading since March 1980, when Jimmy Carter was depressing the nation.

Retail sales rose to a new record high of $3.95 trillion (saar) during September, up 18.6% since their most recent cyclical low of $3.33 trillion during March 2009. It is puzzling, though, that over the same period (through August), personal disposable income is up only 8.5%, with wages and salaries up 7.1%. On the other hand, rebounding strongly along with retail sales is the 12-month sum of individual income tax receipts, which is up 28.9% from its January 2010 low of $846.8 billion to $1.09 trillion through September of this year. This suggests that personal income may be revised up eventually.
That all sounds very good and certainly doesn’t support the dire warnings of the double-dippers. However, the picture isn’t quite as rosy for inflation-adjusted retail sales. While I estimate that they were up 1.0% during September, real retail sales are no higher than during last November. Real retail sales have been essentially flat since then for the past eleven months. They are also still 5.2% below the record high during December 2006.

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