I’m not an economist. Nor do I play one on television. Further, I haven’t stayed at a Holiday Inn Express in recent memory. As such, I encourage you to proceed with caution, because I am going to talk economic data.

Generally speaking, economic releases, especially those related to retail sales, are pretty straight forward. Every month, around the 13th of each month, the U.S. Census Bureau releases Advanced Monthly Sales for Retail Trade and Food Services. The data provides macro monthly change information, as well as detailed breakouts by sub-segments (see August report here). Advanced numbers are later revised and termed “preliminary” and then later revised and termed “actual”. This process takes approximately 90 days. Eight times a year the Federal Reserve Board publishes a Summary of Commentary on Current Economic Conditions by Reserve District, or the Beige Book, for short. The Beige Book gathers anecdotal information by District and sector, through interviews with business leaders, economists, etc. and provides anecdotal information on the current economic climate. Given the generally high correlation between economic health and the current economic climate, people generally believe the Beige Book is a good leading indicator of forward retail sales estimates. Collectively these factors are used to predict the earnings of retails who report on a quarterly basis. Wasn’t that simple?

Now that we have our reporting pattern down. Let’s look at some data.

The chart above is more or less typical of the retail sales cycle. Sales fall preciptiously in January, post holidays, rebound through the spring, seek to find direction through the summer, rebound for the back to school sales, only to fall again before building through the holidays. What appears concerning about the chart above is the precipitous fall between June and July 2008, over a 10% drop. However, when we consider that the economic stmiulas package of 2008 held retail sales up for May and June, the drop is reasonably out of context. While one might be fooled if they relied on a linear trend line (the straight line in the above chart), a polynomial trendline (the curved line in the above chart) would have forecasted the fall, albeit maybe not as precipitiously.

So fast forward to today, Wal-Mart Stores Inc., the world’s largest retailer, reported a solid gain that beat Wall Street forecasts. However, mall-based apparel stores, appeared to remain in the doldrums. High-end retailers posted weaker results as their affluent customers start to feel the impact of the economic slowdown. This is all no surprise to anyone despite the fact that gas prices have abated somewhat. What does baffle me is that nearly every market analyst missed in their forecast. Combined with weak labor data, the Dow Jones Industrial Average was down 344 points.

So now I will play arm chair analyst on why I think the pundits over shot (yes, I understand hindsight is 20/20):

1) My first answer lies in an incomplete understanding of recent GDP growth. In early 2008, despite not being in a technical recession there were many articles that communicated the belief that, numbers notwithstanding, we are in a contracting economic climate. This turned out to be true. Then on August 28, the Department of Commerce revised second quarter GDP growth to 3.3%, up from 1.9%. A significant increase from the 0.9% growth in the first quarter. We generally do not equate such growth rates with a recession, and as such maybe analysts believed that that the good times would soon be back and that things were not as bad as reported. Too bad quarterly growth was due almost entirely to exports. I would have loved to have known the GDP growth figure ex-stimulus checks, but not sure that would be possible. (side note: Intrade.com, where you can bet on nearly anything saw a marked increase in the price associated with the U.S. economy going into a technical recession in 2008 to 10.8%).

2) A second theory is the analysts got away from the Beige Book which has, for the last two releases, been stating that the economy was weakening and consumer spending trends were deteriorating in most parts of the country. Granted the second instance of this came just yesterday and therefore reaction opportunity was lost by then.

3) Third, I suspect that analysts underestimated the financial condition that many of these firms are currently in. While debt is not a substantive problem for these companies, inventory factoring is not free and has become more costly. Many retailers entered the quarter with historically low inventories and therefore lacked clearance merchandise to bargain hunting consumers.

4) Lastly, the reason might have been completely unrelated to the any of the above, but rather the Republican National Convention. Maybe the market wanted more data on the McCain/Pallin economic plan. Just a thought.

I’m thankful that we have economists, that way I don’t have to be because I would surly never make a living. However, I expect more critical thinking from the lot. Maybe I am being too critical, but my view is all the signs were there and most people just flat out missed them in sequence.

/bryan

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