Is Retail Inextricably Tied to Housing?

Our sister publication NREI asks, "Is Retail Inextricably Tied to Housing?"

It's true that for many, many months pundits have continued to predict that retail sales would fall as a direct result of the slowdown in housing. Certainly, sales growth has slowed this year. Same-store sales growth has averaged about 2.4 percent per month in 2007. That's below each of the past three years when the figures for 2006, 2005 and 2004 were 3.6 percent, 3.9 percent and 3.8 percent, respectively.

But it hasn't been Armageddon. Only April--when same store sales fell 1.9 percent--sticks out as a truly disastrous month in the past year.

Still, that sinking feeling persists because of problems in the credit markets, slow wage growth, inflating gas and food prices and the continued shakeout of the housing bubble. As always, we'll just have to continue to wait and see how this plays out.

Meanwhile, the Commerce Department today reported preliminary August and revised July sales figures. The news was mixed. Overall, retail sales were up 0.3 percent. But that was below a forecast of a 0.5 percent gain. Also, when auto sales are stripped out, retail sales actually fell 0.4 percent. (The figure for July, meanwhile, was revised to up 0.7 percent.)

Meanwhile, here's an excerpt from the NREI piece.

“As it stands today, retail sales growth has held up better than the falling housing market would otherwise indicate,” says Suzanne Mulvee, senior real estate economist at Property & Portfolio Research. “For some reason retail sales haven't reacted to falling home prices yet. That's probably because we have very low unemployment today, so people aren't worried about losing their jobs.”

In previous economic cycles, retail sales have followed the ups and downs of the housing market with a lag time of about six months, according to Property & Portfolio Research. In the 1990s, for example, home sales plummeted from year-over-year growth of 20.2% in October 1994 to a year-over-year contraction of 16.5% in October 1995. The three-month moving average of retail sales reacted with a drop from a 7.3% growth in January 1995 to 3.7% growth in January 1996. Those retail sales numbers exclude fuel and automobile sales.

In the current market cycle, however, home and retail sales began to diverge in 2005, when home sales began to slow from a high point of 16.2% in December 2004. Retail sales took off about that time, climbing from 5.8% growth in December 2004 to peak at 8.6% growth in March 2006. Retail has slowed steadily since then but has remained in positive territory, and even rallied from a low of 4.1% in April this year to 4.4% in July.

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