Inventories And Retail Sales Point To Recovery

A couple of data releases today continue to solidify the claim that the U.S. economy is in recovery. First, retail sales in January beat expectations, increasing by 0.5% month-over-month. Second, inventories declined in December by 0.2%. Taken together, this news is quite positive.

Let's start with the sales news. Reuters reports:

The Commerce Department said on Friday total retail sales increased 0.5 percent. In addition, December and November were both revised to show stronger spending.

December sales were revised to down only 0.1 percent, compared with the previously reported fall of 0.3 percent, while November sales were revised to up 2 percent from up 1.8 percent.

Analysts polled by Reuters had forecast retail sales increasing 0.3 percent last month. Compared to January last year, sales were up 4.7 percent.

Actually, the December retail sales news pairs well with the inventory news. If sales actually declined by 0.1% in December, but inventories were still reduced, then that should spell an even larger reduction to inventories in January, when sales were up 0.5%.

It's very important that firms reduce their inventories for the recovery to get some traction. Only when more production is needed will companies begin hiring again. This data indicates job growth could be on the way.

And the year-over-year sales increase above is extremely impressive. A nearly 5% increase is hardly negligible. This implies that consumers are far more comfortable spending than they were last year. We should watch, however, to see if this positive trend continues.

So while it's pretty clear that the economy is on the mend, there's still some question about whether the recovery will effectively create enough new jobs to put a big dent into the extremely high level of unemployment. As I mentioned yesterday, any additional retail demand we're seeing is likely from consumers with jobs who no longer fear getting laid off. The 18% of Americans who are still struggling to find full-time employment won't be spending freely until they're employed. Retail sales growth will likely be constrained until employment improves.