Commentary Directory

Retail Sales: Volatility, Food, and Cars

Jacob Hess
July 26, 2021

Retail sales have been taken for a ride ever since the pandemic first clobbered the economy. The steep drop in consumer activity has been an illustration of the restrictions forced upon individuals, slowing economic activity at historic pace. In 2020, sales fell -8.6% in March and -14.7% in April on a monthly basis pushing the sales level -22.1% below the Feb 2020 level. From peak to trough, this was almost double the -11.8% drop seen after the financial crisis from June 2008 to December 2008. The extreme drops lead into sharp rebounds when stimulus payments combined with diverse reopening strategies caused equally large monthly jumps in retail sales within the same year of the pandemic beginning (+8.7% in June 2020, +7.6% in January 2021, + 11.3% in March 2021).

It makes sense to argue that the strong bounces in retail sales growth were positive for firms that saw a demand shock at the onset of the pandemic, but it may have also been detrimental. From May to October 2020, the 6 month rolling standard deviation of retail sales averaged above 7%, more than double the next most volatile period in 2001-2002 when the 6 month rolling standard deviation peaked at 3.4%. Retail sales volatility peaked at around 2.0% in February 2009 following the Global Financial Crisis.

Business owners like certainty, and the high volatility in retail sales seen in Q2 and Q3 2020 was not a good recipe for confident business planning. Volatility in retail inventories also set a record high in September 2020 with a 6 month rolling standard deviation of 3.2%. The next highest period was January 2002 at 1.3%. While we've cooled from the peaks of uncertainty about a year ago, there is still an sense of mystery about what consumption will look in 2021 with high inflation and supply shortages. Both inventories and retail sales remain as volatile as they were during 2001-2002 and 2008-2009.

On the subject of unprecedented volatility, retail sales for grocery and beverage stores saw the largest decline and gain in back to back months at the onset of the pandemic. After a March 2020 monthly surge of 26.6%, food and beverage store sales cratered -12.9% in April, and after that, they remained relatively stable for the rest of the year. The pandemic period also saw large monthly gains in food and beverage purchases in May 2020 and January 2021, months that coincided with stimulus payments. Indeed, when consumers can't go out and spend money at a restaurant, they're forced to splurge more at the grocery store.

How are food and beverage store sales going to move for the rest of the year? It seems likely that monthly gains in food and beverage sales will remain on par, if not better, than headline gains. So far, average monthly gains made in H1 2021 have outpaced H2 2020 despite restaurants and bars being more open across the country. This suggests that reopening pressures won't be negative on food at home sales. At the same time, renewed fears of a shutdown from the Delta variant (while unlikely to happen) could force consumer back into hoarding mode. Inflation in reopening-related products could also be another factor that keeps people from going out, another factor that could bolster grocery store sales.

Food and Drinking Service (F&D) retail sales was always about getting back to normal. The July reading of the level of F&D retail sales suggested that we have finally caught up with the long-term trend. In particular, F&D sales reached $70.56 billion just below what retail sales would've been at if F&D sales had grown at the long-term average (0.4% monthly average from 1992 to Feb 2021) at $70.65 billion. Based on current summer trends, the pandemic is set to be a net positive in the long run. However, once again, the new surge of the Delta variant could be a potential threat but not a likely one. Not only are many states refusing to reinstate any type of restrictions, but these restrictions would be less severe, less economically damaging, and directed towards the unvaccinated. With one of the highest vaccinations rates in the world, F&D sales in the US are safe.

Motor vehicle (MV) retail sales and production have been in the headlines as of late with the chip shortage putting pressure on automobile supply. While the supply issues have been significant, they were exacerbated by robust demand from consumers as a result of the excess savings that came from stimulus payments. The average monthly changes in MV retail sales in 2020 and 2021 were 1.93% and 2.68%, both higher than the average of any other year in the past 15 years. After removing the months where the change was highly volatile in 2020 and 2021 (large jumps from stimulus payments and large declines from the institution of pandemic restrictions), the averages in those years were significantly less suggesting that the significant gains that have pushed total MV retail sales more than 25% above its pre-pandemic level are a result of the surge in sales due to stimulus.

In the bigger picture, retail sales proved to be one of the stronger economic indicators coming out of the initial wild downward spikes at the beginning of the pandemic. Despite massive layoffs, consumers continued to fuel the US economy through the worst recession in history with the help of unprecedented stimulus from the government. The past few months have seen consumers limited by supply chain issues, but those issues will ease once businesses settle into a business environment with less volatility while consumers remain eager to consumer. That's why we see retail sales continuing to growth through 2021 in the face rise in cases from the Delta variant.

All data from FRED