June 11, 2010 at 15:00 PM EDT
May's Retail Sales Expose the Naked Truth
May retail sales naked truth
May's Retail Sales Report exposed the naked truth about the economy Friday, showing that without government tax incentives, economic activity is still lacking. The Greek opines that the next few months represent an important test that the economy should fail, given the high level of under-employment burdening it.

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May's Retail Sales Expose Naked Truth

May retail salesA busy economic schedule might have caused you to miss the World Cup opening match between South Africa and Mexico today. Retail Sales, Consumer Sentiment and Business Inventories were all reported before 10:00 AM. The Retail Sales Report for May, reported in the pre-market, was all you needed to see though. A surprising drop in activity put the market in a sour mood heading into the weekend.

Retail Sales May

The 8:30 report on May's retail sales surprised many, but not Wall Street Greek readers. May's sales were reported down 1.2%, versus the economists' consensus expectation for a 0.4% increase. April's gain was revised higher, to 0.6%, versus the initial reading of +0.4%. Usually, when such an extreme change occurs, it has something to do with energy prices, or autos in this report. However, when excluding motor vehicles and parts, sales still slipped 1.1%, versus expectations for a gain of 0.2%.

The auto result was intriguing, given motor vehicle sales increased in terms of units in May, so price may have played a role, or possibly the sales of used vehicles or parts slipped. Gasoline station sales definitely played a role in May, as those revenues fell 3.3%. Still, the story ran deeper than that, as sales excluding gasoline and autos still fell 0.8%.

It looks to us like economists missed a surprising drop off in Building Materials & Garden Supply Store sales in May. The 9.3% sales drop in May followed a likewise strange and counter 8.4% sales increase in April. Building Materials sales also rose sharply in March. Thus, the activity looks directly tied to the April 30 expiration of the First-Time Homebuyers Tax Credit, in my view.

Excluding the three factors (autos, gasoline, building materials), sales only inched higher by 0.1% in May. That's still a weak result. Furniture and Home Furnishing Store sales increased by 1.0%. Peter Lynch, my favorite fund manager and important influence in my investment philosophy and strategy, talked about how furniture sales historically lag housing gains. Perhaps this month-over-month increase simply reflects home buying activity ahead of the tax incentive expiration.

Electronics and Appliance Stores sales gained by 0.6%, as another government incentive meant to drive durable goods sales expires. Clothing and accessories stores sales fell 1.3% in May, which likely had something to do with Easter (lifting March, April). General Merchandise (-1.1%) and Department Stores (-1.8%) saw declines as well. Only Non-Store Retailers (web and catalog) did well in May, with their sales gaining by 2.0%.

My general takeaway from the retail sales report is that economic activity is not necessarily ready to run on privately driven demand, as Ben Bernanke sees it. Government crutches have sustained activity to-date (and saved it), and driven spurts of it ahead of incentive expirations. We can see clearly in recent data points that the absence of tax incentive and other government crutches would have the US economy still mired in recession, in my view. So, the next few months present an important test for an economy I view unable to sustain itself given the high level of under-employment that burdens it.

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Editor's Note: This article should interest investors in NYSE: PIR, NYSE: ETH, Nasdaq: HOFT, NYSE: HD, NYSE: LOW, NYSE: LTD, NYSE: CHS, NYSE: ANN, NYSE: GPS, NYSE: M, NYSE: JCP, NYSE: JWN, NYSE: TJX, NYSE: KSS, Nasdaq: COST, NYSE: TGT, NYSE: WMT, Nasdaq: WTSLA, Nasdaq: HOTT, NYSE: AEO, NYSE: ARO, NYSE: ANF, NYSE: SAK, NYSE: TIF, NYSE: TLB, NYSE: LL, Nasdaq: BLDR, NYSE: FO, NYSE: LEG, NYSE: TPX, NYSE: AYI, NYSE: LZB, Nasdaq: SCSS, NYSE: ZZ, NYSE: FBN, NYSE: NTZ.

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