Retail sales data shows changing consumer patterns

In the middle of each month the Census Bureau releases its Advance Monthly Retail Sales report, which includes data on a wide variety of retail establishments. This data is of vital interest to many segments of the plastics industry because the retail sector represents a huge end market for many types of plastics products.

This includes motor vehicle parts, appliance parts, all types of consumer packaging products, sporting-goods, and building materials and supplies. If a plastics processor needs insight into the ever-changing trends in consumer demand, then he or she should closely monitor the trends in the retail sales data.

At first blush, the latest report's headline number (data from the month of January) is less than impressive. The seasonally-adjusted total declined for the second straight month. Total retail sales for January increased by an estimated 2.8 percent when compared with the same month a year earlier. This data is not adjusted for inflation, so if you factor in a 1-2 percent inflation rate during the past year, that makes a gain of 2.8 percent even less impressive.

The chart (right) illustrates that retail sales in the United States have expanded by a rate of 3 percent in each of the past two years. This chart also reveals that a growth rate of 3 percent is low by historical standards during years in which the overall economy is not in a recession. So a year-over-year gain of 2.8 percent for the month of January is not very strong, and it appears to be going in the wrong direction.

A closer inspection of the subcategories of this data reveals that some interesting, and even encouraging trends are starting to emerge in in consumer spending patterns. Plus, the economic fundamentals that support consumer spending and retail sales growth remain quite strong. These include improving jobs numbers, accelerating growth in wages and household incomes, continued improvement in the residential construction sector, and rising consumer confidence levels. My forecast for 2015 calls for an annual gain of 5 percent in U.S. retail sales. This means that the gain this year should be much closer to the long-term average growth rate for this data.

Then what accounts for the slow start to this year? The most obvious reason for the lower-than-expected gain in January is the sharp decline in total receipts for gasoline stations. Last month sales at gasoline stations plummeted by 24 percent when compared with a year ago. This will not surprise anybody because of the sharp decline in the price of gasoline in recent months.

Now I already know what you are thinking. This sharp decline in the price of gasoline is supposed to spur consumer spending on other types of products, and therefore the retail sales numbers should actually start to show some upward momentum. This question is particularly relevant for plastics processors because gasoline is not a product that involves a lot of plastic, but some of the other things that consumers can buy with money they no longer have to spend on gasoline might include plastics products. So where are these savings being spent?

The answer to this question is two-fold. First, there will be a lag in the data. Gasoline prices dropped sharply and rapidly, but that does not mean that the resulting changes in consumer behavior will also be sharp and abrupt. The anticipated increase is the sales data for other products will occur, but it will take a little time before we see it fully represented in the data.

Second, we can see some indication of changes in short-term spending patterns if we look closely at a breakdown of the data. As it turns out, one of the products that consumers are buying with the money they are saving from lower gasoline prices is more gasoline. Total sales of gasoline in terms of dollars were down 24 percent, but the price decrease during the past year was actually much greater than that. So the volume of gasoline being sold at the present time is actually increasing when compared with last year. This increase in gasoline consumption will level off very soon, and then those savings will be allocated towards other products. But for now consumers are choosing to fill their tanks more often.

An example of a retail sector that is doing very well at the present time is motor vehicle dealers. Sales at these establishments jumped 10 percent in January. This is a continuation of the strong upward trend in motor vehicle demand that has prevailed for the past few years, and this trend is most certainly having a large and positive effect on the plastics industry. Based on this data from early in 2015 it is clear that the strong momentum from 2014 was carried into this year.

The January data indicated a strong jump in monthly sales at restaurants and bars. Total monthly receipts for these establishments were up 13 percent in January. This sector is a good indicator of the overall mood of the consumer, and it is logical to think that some of the money saved at the gas pump could easily be allocated to dinner out. Seasonal factors are probably part of the reason for the sharp increase in restaurant sales last month. You will recall that in January of 2014 many kinds of economic activity were impeded by severely cold weather in the U.S. But a 13 percent gain is still a very big number, and this sector merits further attention in future months.

Another category that I am watching with rapt attention is the growth in sales at building materials and supplies dealers. Total receipts for these establishments escalated by 5 percent in January. Sales of building materials are a good indicator of activity levels in the residential construction sector. This is a huge end market for many types of plastics products, and it is a bellwether industry for the future health and vitality of the American economy. We need a strong dose of solid growth in construction spending, be it either for new construction or remodeling and repairs.

And finally there was good news for suppliers of plastics packaging products. Sales at grocery stores were up by almost 4 percent while sales at health and personal care stores increased by more than 5 percent. The growth rates for these two types of establishments are less volatile than for many other sectors, but this level of growth is towards the high-end of the historical averages. These are the end-markets for plastic bottles, caps and closures, bags, and packaging film. A small increase in the sales growth for these stores will produce a large increase in the volume of plastics products consumed.

Contact Wood at billwoo[email protected] or on Twitter @bill2compete.