Disappointing retail sales

Are disappointing retail sales a concern?

Just one day after the stock market soared to a record high, posting the biggest one-day percentage gain in nearly four years, poor retail sales for June threaten to douse the enthusiasm. Wait a minute, you say. Wasn't yesterday's market performance attributable in part to good retail sales results? Yes. It was Wal-Mart in particular that was a shining star relative to the lackluster results of their retailing brethren that got investors' attention. Wal-Mart is a component of the Dow Jones Industrial Average that hit a record high yesterday.

But Wal-Mart is also a discounter. So yesterday's enthusiasm about Wal-Mart is watered down by looking at the bigger picture retailing results announced by the Commerce Department this morning.

Specifically, retail sales fell 0.9 percent in June, and excluding auto sales, were down 0.4 percent from May. Both were bad, and were worse than expected. In fairness, it must be pointed out that the May results were very strong and have since been revised even higher.

While the death knell of the consumer has been sounded repeatedly, the resilience of the consumer has been demonstrated time and time again. I fully expect we will see evidence of that once more. There is never a shortage of negative headlines but do the poor results spell bigger trouble for the U.S. economy? I don't believe so. But it doesn't justify the party on Wall Street yesterday either.

Reader e-mail: Here are a couple of reader e-mails on the subjects of inflation and the Fed.

"I know that the Fed is concerned with inflation excluding food and energy. However, I am a cost analyst for a major utility and all I have seen since 2005 is increases in material costs (e.g., stainless steel, copper). For example, a 1/2" X 4' X 8' sheet of stainless steel has gone from $1375 in 2005 to $2795 in 2006 to $5000 today. As such, how can there not be a larger increase in core inflation. Do cheap imports and/or increases in productivity counteract such increases in commodities? Or is the government painting a rosy picture?"

A little bit of both. The "official" measures of inflation have long been scoffed at by households - and many others - as not reflecting actual price pressures. Add to that the concern that productivity is growing at a slower pace, and you can see why the Fed is so hyped up about inflation. But the specific, firsthand information you've provided about commodity prices is alarming to say the least. Thank you for sharing your insight.

And speaking of the Fed, this reader weighs in on the Fed outlook.

"For a year the Fed has been happy with 5.25% despite constant warnings about inflation dangers. Their current undertone is that no reduction is to be expected until they see a firming trend in what is currently the rate inflation reduction. You never expect the Fed to omit a warning about inflation, because that is the equivalent of warning that past performance, is no indication of future performance. To me, that sounds more like a possibility of a quarter point reduction by first quarter next year.

"The greatest obstacle to a rate reduction is the amount of leveraged money floating in hedge funds and private equity funds. The new Supreme Court ruling permitting price fixing, can also kick up inflation because margins will no longer be subject to a free market auction."