Capital Markets Update #18

No need to worry, all is back to normal, as the Las Vegas visitor volume tracker returned to year-over-year growth in February following 13 months of contraction.   A few friends and readers may see a little of themselves in those statistics…and that’s all we’ll say about that.

In all seriousness, we try and stay in tune with consumer trends using empirical data (not sentiment indicators, they’re useless) in an attempt to produce an as-is and forecast summary of consumer health.  One datapoint we track is the Redbook Retail Sales index. What’s interesting about this index is that it aggregates sales data directly from about 9,000 general merchandise retailers (apparel, department stores, discount retailers, etc.) – and critically excludes food and energy purchases.  In some ways, Redbook sales provides a private stip to the broadly tracked government Advanced Retail Sales report in a manner similar to how the ADP payrolls report helps level-set to the monthly BLS Jobs data release.  Importantly, both the ADP and Redbook datasets are pulled directly from private accounting / HR systems and, critically, lack the lagging inaccuracies that befall the survey methods out of the BLS (Labor Report) and US Census Bureau (Retail Sales).  So, in summary, the Redbook indicator provides a pure-play analysis of weekly spending changes on “general stuff.”  As of April 2026, the weekly Redbook Sales index has indicated pretty stable 6.7% YoY growth in spending.  The data is paywalled, so we can’t run calculations on it, but the direction of travel has steadily and consistently moved upward post-Covid, with average YoY sales growth increasing from about 5% YoY in 2023 to 6.7% YoY growth today.  Furthermore, it’s helpful to note that sales growth hovered between 5% - 6% YoY growth in 2019 (excluding a few outlier months) and 0% to 3.5% growth from 2015 – 2017,  Ultimately, at face value, recent Redbook data suggests a relatively strong and stable profile for domestic discretionary consumption of basic goods. 

However, this needs to be put into perspective.  For instance, Redbook sales growth represents total YoY sales growth amongst a somewhat narrow segment of a consumer’s monthly budget.  General stuff is general stuff, but we also purchase food and energy and pay rent and fly on airplanes and go out to restaurants, etc.  So, for a better picture on underlying consumer demand, we need to strip out inflation.  But, we must be careful which measure of inflation we use.  The Fed reports multiple monthly PCE figures including Real, Chain-Weighted and Actual PCE.  The Fed uses the Chain Weighted measure to index price inflation across the nation, as this measure accounts for product substitution amongst a basket of goods as prices change.  So, for instance, when prices of beef rise precipitously, consumers often pivot to fish or chicken.  Accordingly, an observer can’t sit there and say well prices of beef are up 25%, so inflation is 25%, when in reality the market largely substituted chicken for beef at a flat price.  Thus, actual inflation on the “basket of meat goods” is closer to flat.  What’s important is that we recognize both are true – the price of beef is up 25%, in this example, while consumers are paying close to a flat rate for their “basket of meat products.”  By example, February 2026 Chain-Weighted PCE produced approximately 2.8% YoY inflation while Actual PCE inflation (non-chain weighted) produced a 5.3% YoY increase in prices.  To be clear, both metrics evaluate price action in the same month, just looking at it differently. Real PCE growth for the month saw prices increase 2.5% YoY.  We note these variances given the Redbook sales performance of 6.7% growth likely needs to be deflated by some number closer to the unweighted Actual PCE rate than the chain weighted growth rate.  Why?  Because Redbook doesn’t adjust its dataset for substitution, so neither should we.  Thus, “Real Redbook Sales Growth” would likely be somewhere around 1.5% - 2.0% growth, in our opinion.   Which is still good, that’s expansionary, and that’s why all this math is worth it.  With a bit of digging we can somewhat confidently say the consumer is expanding its consumption habits, after properly adjusting for inflation.

We bring this up given the US Census bureau just released its latest monthly retail sales report for March 2025.  Total retail sales were up 3.8% YoY, 4.7% YoY excluding motor vehicles, 3.7% YoY excluding gas stations and 4.6% YoY excluding both motor vehicles and gas stations.  Given this is a relatively broad dataset which, by definition, incorporates a certain amount of substitution, we can take the annual reading of 3.8% YoY growth and pull out 2.8% chain weighted PCE to derive a 1.0% increase in real retail sales.   Which isn’t far from the real Redbook number we solved to.

Our point in this note is to not trust a single datapoint and to learn how to thoughtfully break down data into its component pieces.  Because all of these numbers are actually factual and without the ability to fact check a headline, its easy to fall victim to an ill-conceived, albeit punchy takeaway.  You could just as easily say retail sales are up 6.7% YoY according to Redbook as you could say they’re up 3.8% YoY according to the government.  Similarly, if you tried to adjust for inflation, you could pull out either 5.3% PCE or 2.8% PCE (or 2.5% real PCE, for that matter).  If you took Redbook sales of 6.7% and pulled out 2.8% PCE you might conclude that real spending growth was closer to 4.0% YoY, which would be exceptional but ultimately inaccurate.  So, we believe its both helpful and thoughtful to understand the various datasets available to us and use them to our advantage as we construct the most accurate picture possible of our economy.