That third-quarter GDP report coming in a couple of weeks looms over the midterms and the Biden administration, and the portents look gloomier and gloomier. Even with gasoline prices descending rapidly in the three-month period, economic activity appears to have declined with them — especially in retail sales.

Today’s monthly report shows a flat September for consumer activity, but that report misses one key element:

Advance estimates of U.S. retail and food services sales for September 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $684.0 billion, virtually unchanged (±0.5 percent)* from the previous month, but 8.2 percent (±0.7 percent) above September 2021. Total sales for the July 2022 through September 2022 period were up 9.2 percent (±0.5 percent) from the same period a year ago. The July 2022 to August 2022 percent change was revised from up 0.3% (±0.5 percent)* to up 0.4 percent (±0.2 percent).

Retail trade sales were down 0.1 percent (±0.4 percent)* from August 2022, but up 7.8 percent (±0.7 percent) above last year. Gasoline stations were up 20.6 percent (±1.6 percent) from September 2021, while Nonstore retailers were up 11.6 percent (±1.1 percent) from last year.

So what’s missing? Inflation, as noted in the emphasis I added to the above excerpt. This report does not adjust for inflation, and so these numbers are not “real” in the sense used by economists. They are only seasonally adjusted, but the figures are nominal.

If year-on-year inflation runs at 8.2% and year-on-year retail sales increased by 8.2%, then it means that real retail sales were stagnant over that period. If CPI inflation went up 0.4% in September, according to yesterday’s report, and retail sales were flat in the same month, then it means that the same amount of money bought less goods and services.  Economic activity declined in September, in other words.

And given the unadjusted results of the other two months in the quarter, this looks like a possibly recessionary result overall:

That doesn’t look good, but there’s one positive note. They see nominal retail sales rising 9.2% in Q3 overall, which is at least above the current rate of inflation. However, CPI inflation in July was 8.5% and it was 8.3% in August. That suggests that the US economy eked out a positive gain in real retail activity, but not by much. If it’s positive, it will be a very weak result in Q3.

That brings us to a couple of caveats on this report series. For one thing, it’s a survey, albeit a fairly sturdy and reliable survey with a margin of error of ±0.5%, as the report itself notes. The data in the quarterly GDP report will likely be a little more comprehensive, and may reflect somewhat different reporting. It’s also not the only contributor to GDP, although the US economy is primarily driven by “personal consumption expenditures” (PCE), which are in fact mainly retail purchases. Business investment, government spending, and other factors matter quite a bit. Plus, the trade balance plays a large role in GDP results, as we saw in both Q1 and Q2, with enormous (and largely off-setting) trade imbalances.

So how did that look in Q3? Not too bad so far, actually, perhaps short enough to potentially add to the positive. We don’t have that data for September yet, though, and the export strength came mainly from not declining as fast as imports did:

The trade deficit in the US narrowed to $67.4 billion in August of 2022, the lowest since May last year, and slightly below market forecasts of a $67.7 billion gap. It reflected a decrease in the goods deficit of $3.4 billion to $87.6 billion and a decrease in the services surplus of $0.4 billion to $20.2 billion. Imports declined 1.1% to $326.3 billion, led by falls in crude and fuel oil, semiconductors, civilian aircrafts and computers. On the other hand, purchases rose for passenger cars, travel and charges for use of intellectual property. Meanwhile, exports fell at a much slower 0.3% to $258.9 billion, with main decreases seen for nonmonetary gold, crude oil, passenger cars and travel, while shipments of natural gas, pharmaceutical preparations and financial services went up.

source: tradingeconomics.com

We won’t know about September’s trade deficit until after the advance estimate on GDP. The more definitive report will come out in early November. However, the advance estimate will likely have enough data to be within range of accuracy. When looking at this chart, remember that the WSJ estimated the strong trade imbalance favoring exports in Q2 may have added 1.4 points to the annualized GDP, which still landed at -0.6% anyway. Those numbers will be part of the comparison in this quarter too, but if the US had another strong export quarter, we could see a positive result in the final economic report before the election.

With this level of consumer activity, though, I wouldn’t bet that way. If it comes back negative in the final week of the year election cycle, the White House will have to face lots of questions about their stewardship of the economy — as well as the failure of their short-term demand-stimulus policies. Even if it’s narrowly positive, it might not be enough to deflect those questions.

Update: Corrected “year” in the final paragraph with what I actually meant — sorry.