The Real Reason Why Retail Sales Rose? Discounts

Lost in the fog about the record 0.5% growth in December and 6.6% gain in 2010 retail sales was the reason behind it: discounts.

Retailers — both large and small — learned their lesson from recent disastrous holiday sales and cut prices early and often to move merchandise.   This resulted in record holiday sales, but what about margins.   Wall Street is expecting robust earnings from the likes of Wal-Mart Stores Inc.  (NYSE:WMT) and Macy’s Inc. (NYSE:M), though it won’t be clear until results come in next month whether this optimism is misplaced.

Though retailers posted their biggest yearly gain since 1999 and their biggest monthly boost in 18 months, there may be less to these statistics than meets the eye.  The reason behind these stratospheric gains was their calamitous declines. In other words, they had nowhere to go but up.  Moreover, the yearly figures of $4.51 trillion lagged behind 2007 and 2008 so champagne cork popping is not in order.

“Consumers have been spending more due to relatively good news on the employment front, pent-up demand, low prices, and a significant decline in the non-mortgage debt to disposable income ratio,” says Chris G. Christopher, senior principal economist of IHS Global Insight, in a press release. ” However, consumers are not throwing caution to the wind because of gasoline and food prices, a high and persistent unemployment rate, and an extremely depressed housing market.”

Spending by average Americans accounts for 70% of economic activity, so it is closely watched.  Too closely at times.  Measurements of consumer sentiment are one of those economic measurements of what is ultimately something that is unknowable.  Consumer sentiment is a valid measurement but it is often little more than a guess calculated using advanced computer algorithms.  It’s hard to gauge its accuracy because it’s impossible at times if an economic reaction is due to nervousness or an upset stomach.

Remember this thought when some pundit spouts off about market psychology.  It’s easier to say that “investors are nervous” or “investors are feeling confident” rather than say “I have no clue what’s going on” which is oftentimes closer to the truth.  That sort of honesty won’t get anyone asked back on CNBC.

In closing, rising retail sales is good news but not great news.  Investors still are not sure if the trend  smoke and mirrors held up by discounts which retailers will have to continue to provide at the expense of their margins.

–Jonathan Berr