Pain in Spain and Elsewhere

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 13, 2012 1:04:22 PM

and tagged Debt Crisis, Market Updates

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The pain in Spain continues, with yields hitting a euro-area high of 6.8 percent—very close to what is widely viewed as the 7-percent red line that would compel a bailout. Intra-European political debates about how best to handle the situation are ongoing, with non-Germans demanding that Germany pay and Germany, understandably, looking for other options.

I don’t want to talk about that today, though, for a couple of reasons. First, because we already discussed it for the past two days and nothing material has changed. And second, because there is some U.S. economic news that warrants discussion.

And that news is the 0.2-percent decline in retail sales. Normally, we expect retail sales to increase, so a decline can be worrying. This decline is probably due, at least in part, to the very weak employment figures announced recently; a decrease in jobs growth can be expected to cut spending somewhat.

But the drop in retail sales was also largely driven by a decrease in gasoline prices, which is a positive. On the other hand, when you strip out gas, autos, and building materials, sales were flat, which indicates that the trend of spending growth has slowed quite a bit—and that has negative implications for future growth.

The negatives, in my opinion, are somewhat offset by the positives. Decreases in gas prices typically support spending in other areas that have more economic effect, and increases in auto sales typically have a multiplier effect in other areas. Nonetheless, it seems clear that growth is likely to slow somewhat going forward.

As many of you know, I consider employment to be the primary economic indicator, and the slowing growth over the past month will continue to have knock-on effects across the board. The retail sales figures are one of the first signs of that. We shall have to see what the next ones will be.

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