Smith Faculty Opinion Article	October 13, 2006
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Retail Sales Fall in September Because Gasoline Prices Fall
Non-Gasoline Sales Jump and Strong Holiday Sales to Follow

Today, the Commerce Department reported September retail sales decreased 0.4 percent from August, and retail sales, less automobiles and parts, were down 0.5 percent. Compared to a year ago, September retail sales were up 5.5 percent, and excluding automobiles and parts, retail sales increased 5.5 percent.

These aggregate data mask a more fundamental shift. Gasoline sales dropped with prices in September, and gasoline sales are included in these aggregate data.

Excluding gasoline sales, retail sales jumped 0.6 percent. That is a very strong showing and bodes well for the holiday season.

The overall effect of lower gasoline prices lags a month with credit card statements, and October promises to be a very strong month.

Fourth quarter GDP growth promises to be stronger, and rising profits should sustain the stock market rally.

Gas Prices, Retail Sales and Growth

In July and August, rising gasoline prices pinched consumer pocketbooks and slowed the economy, but in September, store traffic and non-gasoline retail sales jumped as gasoline prices fell.

In September, the average retail price of gasoline was down 40 cents per gallon percent, or 13 percent. Gas station sales fell 9.3 percent. That greatly benefited sales of nonessential items such as clothing, which jumped 3.3 percent from August. Other big winners were sporting goods, restaurants, and home improvement and garden supplies.

Since September, gasoline prices have fallen another 35 cents a gallon. If sustained, lower gas prices will free up enough disposable income to lift non-gasoline retail sales by two percentage points over 2005 levels and give the economy a needed jolt.

Going forward, inflation will moderate. Although home sales have softened, houses have appreciated about 50 percent over the last five years. While homeowners may not expect much appreciation over the next twelve months and values may fall in some cities, consumers will still have considerable home equity to cushion their balance sheets and finance additional spending. The reservoir of wealth created by the housing boom has not evaporated and has only been partially tapped.

The combination of falling gas prices and the realization that housing prices are not collapsing will give consumer confidence a lift. Prospects for the holiday season are better than retailers expected in early September.

Early season sales and markdowns will be more limited than in recent years, and profit margins stronger than analysts predicted in early September.

The retail sector and economy will outperform the consensus of prognosticators. Fourth quarter and first half 2007 GDP growth will post above 3 percent.

The combination of stronger than expected retail sales and GDP growth will lift corporate profits and stock prices. The stock market rally should continue, and the gains enjoyed by the large caps should spread to medium and smaller cap companies as well.

Retail Trends

Women's clothing is doing well for several reasons. Consumers have more money to spend than expected, and designers are offering clothes that sharply depart from recent seasons, prompting women to turn their wardrobes. Fall and winter offerings are much more in line with an economic outlook of constrained optimisms fewer frills, more grays and subdued tones will compliment a general return to moderate expectations about careers, housing values and the business outlook.

Chain retailers ranging from Target to JCPenny to Nordstrom are well positioned, as are dedicated apparel retailers, like Ann Taylor, Talbots and The Limited. Even the franchises of specialty retailers like Lilly Pulitzer and Sigrid Olsen should benefit from these trends.

For men, a moderating job market will impel more traditionalism, and support sales of conventional, more essential dress clothes. This bodes well for stores like Nordstrom, JCPenny and Joseph A. Bank.

Consumer electronics will post decent growth but no new must have technology will kick up that sector. Content and quality will drive sales. Consumers will not be hunting for the lowest prices but will insist on good value and robust performance. In the computer sector, this will enhance the trend towards more sales at brick and mortar outlets.

Overall, middle-range and value retailers that crowd racks and shelves with clothing, accessories, electronics, and other gadgets following these trends will do well.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.