Wednesday, April 14, 2010
Retail sales have recovered quite nicely in the past year. As for the shape of the recovery, I think the bottom chart says it best: that's a V if I've ever seen one. No matter you slice and dice the retail sales numbers (e.g., ex-autos, or inflation-adjusted), the results are strong, and a whole lot better than the market expected just one year ago. However, sales still need to recover by another 10% or so before they catch back up to where they would have been absent the financial panic of 2008.
Skeptics will say that sales are up in large part thanks to stimulus spending, but I don't buy that. Stimulus spending, when viewed from a supply-side perspective, just takes money from one person's pocket and puts it in another's. It doesn't create new demand. Even some supply-siders will look at these numbers with some skepticism: How can demand have recovered so strongly without any meaningful growth in jobs?
I think that the recovery we see in these numbers is a function of monetary velocity. (See related posts here.) Consumers shut down their spending in late 2008 due to the huge panic and uncertainty surrounding what appeared to be a global financial crisis that would lead to massive bankruptcies and depression. The demand for money rose sharply as a result. Now that money is getting spent again; money that was stored up is once again flowing into the economy. It was a panic-driven recession, and once the panic subsided and people saw that they economy was going to survive largely intact, they ramped up their spending. This is an unusual recovery since this time a resurgence in demand is preceding a resurgence in jobs.
Once the rising money velocity story plays itself out (say, by early next year), we will probably see the pace of recovery slow back down. Growth from that point will be more a function of new investment and jobs creation than anything else. It might prove to be tough sledding, however, if tax rates rise as expected. But that's tomorrow's concern. For the moment it's just very nice to be getting back to some semblance of normality.
Posted by Scott Grannis at 8:38 AM