Retail sales plunge questionable
The Census Bureau reported that retail sales dropped 2.4 percent in September after inching up 0.4 percent in August. Excluding the volatile auto sector, retail sales decreased 1.6 percent, more than offsetting minor gains of the previous two months. Consequently, retail sales posted a 1 percent drop in the third quarter relative to the previous quarter; non-auto retail sales declined at a 0.6 percent rate. This was the first drop in quarterly retail sales since the second quarter of 1997. Most economists said this is evidence of a U.S. recession.

Given the quarterly decline in retail sales, it is likely that third quarter GDP growth will be negative. After all, consumer spending accounts for two-thirds of GDP. Yet total consumption expenditures may not necessarily be negative given that consumer services tend to be more stable on a month-to-month basis and likely didn't see the sharp fall-off that was evident in retail sales.

Majority view or not, the question of recession is still up in the air. There are some special factors associated with this retail sales report that should not be ignored. No doubt, everyone had expected at least a moderate drop in retail sales during the month given that consumers were sitting in front of their television sets in the week following the September 11 attack. Retail sales probably were pretty anemic that week. However, sales likely picked up a bit in the last ten days of the month. Unfortunately, the retail sales report is preliminary and mostly covered data through September 18.

To top things off, the Census Bureau jiggered the data because they didn't believe what their seasonal adjustment program was telling them. Instead of showing smoother data, their judgment told them that the data would be weaker. The government agency felt justified in adjusting the data manually because they had a small sample that didn't cover the entire period. In fact, anecdotal evidence showed that sales were indeed picking up steam through the end of the month. We may find that revisions are larger than usual in subsequent months when more complete data becomes available.

A 4.6 percent drop in auto sales didn't correspond with the smaller decline seen in the already reported unit sales figures. The two series don't often match, but there could be a good reason. For instance, suppose auto dealers were offering price rebates as well to attract customers, this would show up as a drop in dollar volume of auto and truck sales. After adjusting for price differences, the total drop in auto sales might not be as large.

This would be true for other retail sales as well. If retailers were slashing prices to entice consumers, the real (inflation-adjusted) figures would not be as weak. Granted, lower prices do mean smaller profit margins and would ultimately hurt retailers in the third quarter.

The bulk of the negative impact from the attack will probably be contained in the month of September. Perhaps consumers will be cautious in their spending in the final three months of the year, but barring further episodes from terrorists, we should see some improvement in sales. Anecdotal evidence reveals that automakers have seen a dramatic surge in auto sales because of the 0% financing. Reduced interest rates in general have also helped to stabilize consumer confidence. The University of Michigan's consumer sentiment index gained 2 points in the first week of October relative to September's month-end level.

PPI Surprise
The producer price index rose 0.4 percent for the second straight month. Nevertheless, the year-over-year change in the total PPI edged back down in September to 1.7 after a momentary uptick to 2.1 percent in August. Energy prices were higher in September, rising 0.9 percent. Food prices were relatively subdued, increasing 0.2 percent for the month. Excluding the volatile food and energy components, the PPI rose 0.3 percent and more than offsetting the 0.1 percent dip posted in August. Nonetheless, the yearly rise in the core PPI was unchanged at 1.3 percent.

Prices of capital equipment were unchanged in September, but prices of non-food, non-energy consumer goods rose 0.4 percent for the month. This would have been somewhat disconcerting except for the fact that motor vehicle prices were lifted because of new model year quality adjustments. We already know that rebates and 0% financing in September helped reduce car prices for consumers.

Prices of goods at earlier stages of processing remained in check. Excluding food and energy, intermediate goods prices declined 0.1 percent and were down 0.9 percent from year ago levels. Crude goods prices (excluding food and energy) edged up 0.2 percent, but were down 10.1 percent from year ago levels. Inflationary pressures are not in the pipeline and these figures should not worry policymakers at this time.