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Playing the ‘Earnings, Retail Sales and Inflation’ Pinball Game

0 42 Economic

by Alex Carrick

Total retail sales lately in Canada have been ‘going gangbusters’. In May, they were +0.6% month to month (m/m) and +7.3% year over year (y/y).
2016-07-28-Retail-Graphic

On only two other occasions since March 2010 (+9.0%) have Canadian y/y total retail sales been as upbeat – in January (+8.6%) and February (+7.5%) of 2016.

The benchmark usually accepted to delineate a strong level of retail sales is +5.0% y/y and higher. After adjusting for a standard or normal inflation rate of about +2.0% y/y, +5.0% allows for a ‘real’ increase of around +3.0%.

Such a retail sales increase lays down a good base for gross domestic product (GDP) growth. Consumer spending is a big part of GDP in both Canada (55%) and the U.S. (70%). (It accounts for a lower share of Canada’s GDP because foreign trade plays a bigger role north of the border.)

The y/y figure of +7.0% for Canadian retail sales is that much more impressive when one considers that the all-items consumer price index (CPI) currently sits at only +1.0% y/y.

Some of the y/y cash register gains realized by Canadian shopkeepers in May were: ‘new car dealers, used and parts’, +14.0%; ‘electronics and appliance stores’, +13.4%; ‘building material and garden equipment’ sellers, +12.2%; and ‘furniture and home furnishing’ stores, +6.2%.

The latest comparable numbers for the U.S. weren’t nearly as chipper. The June Advance Monthly Sales for Retail and Food Services report from the Census Bureau records a total U.S. dollar volume that was -0.2% m/m and +2.8% y/y.

Moreover, the U.S. inflation increase has been a little speedier than in Canada, at +1.6% y/y for the all-items CPI. That doesn’t leave much room for ‘real’ retail sales growth.

The y/y performances in some of America’s key retail sub-sectors in June were: ‘building material and garden equipment and supplies dealers’, +5.1%; ‘motor vehicle and parts dealers’, +4.7%; ‘furniture and home furnishing stores’, +2.5%; and ‘electronics and appliance stores’, +0.8%.

But there’s also the category with the seemingly innocuous and bland title ‘nonstore retailers’ and this is where the ‘heat’ in retail sales is now being generated. This designation includes electronic shopping over the Internet and purchases being made from mail-order houses. Its y/y gain in receipts in June was a more dynamic +9.5%.

The solid line in Graph 1 accompanying this article shows the explosive and exponential growth in U.S. ‘electronic shopping and mail-order house’ sales from 2000 to the present. The order of magnitude of the increase has been a factor of 17, from $2.7 billion to over $45 billion.

Graph 1: U.S. Monthly Retail Sales, Seasonally Adjusted (SA)
U.S. Monthly Retail Sales, Seasonally Adjusted
* L.D. stands for 'leased departments'.
Data source: Census Bureau
Chart: ConstructConnect

The other two lines in Graph 1 are also interesting. The dotted line highlights another category – ‘warehouse club and superstore’ sales – that is being overlooked in all the hoopla about on-line retail sales platforms.

The warehouse club and superstore segment had remarkable sales growth from 2000 until the onset of the Great Recession in 2008. During the Big Dip (2008-2009), it flattened out, but did not fall into decline.

From 2010 on, it has been climbing once again, although with a slope that’s no longer quite as steep.

Nevertheless, warehouse club and superstore sales have risen by a multiple of nearly 13 times since the turn of the millennium.

The final line, comprised of circular markers, tells a different story. It highlights where sales have been in a prolonged slump. Department stores selling a generalized array of products have not been able to retain customers.

Their ‘current dollar’ level of sales is now only 89% of where they were in 2000. On an inflation-adjusted ‘constant dollar’ basis, their sales have plummeted.

The ‘department store’ bloc is one main cornerstone of ‘bricks and mortar’ retail activity that has been crumbling dramatically.

To what degree are compensation levels supporting consumer purchases?

Table 1, taken from latest Bureau of Labor Statistics (BLS)’s Employment Situation Report, summarizes how workers in various employment categories have been faring.

For many employees, the pick-up in compensation levels has been less than fully satisfying.

In Table 1, y/y earnings gains of +3.0%, either hourly or weekly, have been highlighted. The best hourly rate improvements in the U.S. have come in ‘information services’, +4.8%; the ‘leisure and hospitality’ sector, +4.0%; and with firms engaged in ‘financial activities’, +3.1%.

Table 1: Earnings of All Employees on U.S. Private Non-farm Payrolls
Average Hourly Average Weekly
Jun 2016 Jun 2017 % Change Jun 2016 Jun 2017 % Change
Total $25.62 $26.25 2.5% $881.33 $905.63 2.8%
Goods producing $26.91 $27.52 2.3% $1,084.47 $1,111.81 2.5%
Mining & logging $32.14 $32.49 1.1% $1,382.02 $1,455.55 5.3%
Construction $28.13 $28.82 2.5% $1,099.88 $1,129.74 2.7%
Manufacturing $25.97 $26.51 2.1% $1,056.98 $1,081.61 2.3%
Durables $27.29 $27.76 1.7% $1,124.35 $1,146.49 2.0%
Non-durables $23.70 $24.35 2.7% $945.63 $974.00 3.0%
Services providing $25.32 $25.96 2.5% $843.16 $864.47 2.5%
Wholesale trade $29.50 $30.07 1.9% $1,144.60 $1,172.73 2.5%
Retail trade $17.91 $18.13 1.2% $555.21 $562.03 1.2%
Transportation & warehousing $23.26 $23.81 2.4% $902.49 $930.97 3.2%
Utilities $38.47 $39.05 1.5% $1,627.28 $1,651.82 1.5%
Information services $36.56 $38.30 4.8% $1,316.16 $1,386.46 5.3%
Financial activities $32.12 $33.11 3.1% $1,204.50 $1,244.94 3.4%
Professional & business services $30.81 $31.51 2.3% $1,109.16 $1,137.51 2.6%
Education & health $25.69 $26.22 2.1% $845.20 $862.64 2.1%
Leisure & hospitality $14.84 $15.43 4.0% $387.32 $402.72 4.0%
Data source: Table B-3, Employment Situation Report, Bureau of Labor Statistics.
Table: ConstructConnect

There is a doubling in the number of sectors where employees are seeing y/y average weekly earnings of +3.0% or more: ‘mining and logging’, +5.3%; ‘information services’, also +5.3%; ‘leisure and hospitality’, +4.0%; ‘financial activities’, +3.4%; ‘transportation and warehousing’, +3.2%; and ‘non-durables manufacturing’, +3.0%.

Compensation rates in Canada, year over year, have been advancing more slowly than in the U.S. As appearing in Statistics Canada’s Cansim Table No. 282-0071, average hourly wages for all jobs in Canada were +1.3% in June and average weekly wages were +1.1%.

Workers in a couple of sectors did step out in front of the pack. In ‘utilities’, average hourly earnings were +5.3% and average weekly earnings, +5.8%. In ‘accommodation and food services’ (i.e., the equivalent of U.S. ‘leisure and hospitality’), the comparable figures were +4.8% and +4.3%.

In Canadian construction, though, the hourly and weekly wage rates were -1.8% and -1.6%.

Given the sluggishness in earnings growth, it’s just as well that prices have been staying restrained.

Table 2 points out areas where wage earners in the U.S. and Canada are apparently realizing bargains on their purchases. Or are being met with unpleasant upwards shocks.

Table 2: Consumer Price Index (CPI)
Inflation U.S. and Canada
June 2017 versus June 2016; Year vs Previous Year (Y/Y)
U.S. Canada
All items 1.6% 1.0%
All items excluding food & energy
(also known as the 'core' rate of inflation) 1.7% 1.4%
Food at home -0.1% -0.3%
Meat -1.0% -0.1%
Fresh fruit 1.1% -1.0%
Fresh vegetables 1.6% 4.3%
Food at restaurants 2.2% 2.5%
Alcoholic beverages 1.0% 1.6%
Alcohol served in licensed establishments 2.4% 1.3%
Pet food & supplies -1.8% 1.2%
Motor vehicle purchase 0.0% -0.2%
Motor vehicle parts & accessories -0.3% 1.6%
Motor vehicle maintenance & repair 1.4% 1.7%
Motor vehicle insurance premiums 7.7% 2.1%
Gasoline -0.4% -1.4%
Rent of primary residence 3.9% 0.7%
Furniture -0.7% -2.1%
Major household appliances -7.0% -3.3%
Electricity 2.5% -5.3%
Women's clothing -1.4% -2.5%
Men's clothing -1.5% -2.9%
Accessories, watches & jewellery 1.5% -1.8%
Medical/health care services 2.5% 2.0%
Child care services & nursery school 2.9% 1.8%
Tuition fees 1.9% 2.8%
Data sources: Bureau of Labor Statsitcs (BLS) and Statistics Canada's Cansim Table 326-0020.
Table: ConstructConnect

Lightly shaded in blue are y/y negative percentage changes of at least -2.5%. More heavily shaded in yellow are percentage changes of +2.5% or more.

U.S. purchasers are realizing a significant break on the cost of ‘major household appliances’, -7.0%. But they are facing more expensive charges for ‘motor vehicle insurance premiums’, +7.7%; ‘rent for primary residences’, +3.9%; ‘child care services and nursery school sign-ups’, +2.9%; ‘electricity’, +2.5%; and ‘health care costs’, also +2.5%.

Canadian consumers are enjoying cooler y/y prices for ‘electricity’, -5.3%; major household appliances’, -3.3%; ‘men’s clothing’, -2.9%; and ‘women’s clothing’, -2.5%.

But goods and services for which Canadian are paying noticeably more y/y are: ‘fresh vegetables’, +4.3%; ‘tuition fees’, +2.8%; and ‘food at restaurants’, +2.5%.

Sometimes, life seems like a pinball game. From a working stiff’s perspective, it’s all about trying to keep ricocheting madly from one corner of the earnings, retail purchases and inflation triangle to the other, while hopefully chalking up enough points to keep playing.

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