Retail sales post modest growth

Retail sales rose modestly in January, probably due to the expiration of the payroll tax holiday. Total sales are up 4.4% in the past year; excluding autos, they are up 3.6%. Nothing very exciting going on here, but nothing awful either.

Adjusted for inflation, retail sales have recovered completely from their recession slump, having risen almost 17% from their 2009 low. But they are still well below where they could have been, had this been a normal recovery.

The retail sales "control group" shown in the chart above removes the most volatile items: autos, building materials, and gasoline stations. That makes it easier to see what's happened to sales and the economy. For 16 years sales grew at about 5% per year on average. Then came the recession, and sales have yet to recover any of the ground lost relative to their long-term trend. Ever since the recession ended in mid-2009, sales have been about 10% below where they might have been if this had been a typical recovery. That "gap" amounts to almost $600 billion per year in "lost" retail sales (the control group averages about 65% of total retail sales).

As the chart above shows, one thing that happened to make this recovery different was the loss of roughly 10 million workers from the labor force. For decades, the labor force (those working plus those looking for work) rose about 1% per year, in line with population growth. Then came the recession in 2008, and the labor force stopped growing. Today we have about 10 million fewer people in the workforce than we would have had if the 1% long-term trend were still in place. Where did they go? Many undoubtedly just gave up looking, and many of those were probably young and inexperienced workers who were priced out of the market because of increases in the minimum wage. Some became disabled: there are 1.6 million more disabled workers today than there were at the end of 2008. With 16 million more people receiving food stamps today than at the end of 2008, some are finding it a bit easier to give up looking for a job, especially when several family members are collecting food stamps at the same time. 

With jobs hard to get here, but conditions in Mexico improving (the Mexican stock market is now 35% above its pre-recession high), the U.S. is receiving far fewer immigrants looking for work. The Pew Hispanic Center estimates that net migration from Mexico is now zero or negative. Without immigration to supplement the declining rate of U.S. population growth, our labor force growth cannot sustain its long-term trend. A shortage of immigrants—also the result of our decision to issue no more than 520K immigrant visas a year—is likely a significant and overlooked factor behind our sluggish growth.

Reducing or eliminating minimum wage laws and opening our doors to all immigrants willing to work could go a long way to revitalizing the U.S. economy. 

Giving businesses new incentives to expand could also make a big difference. Reducing or eliminating the corporate income tax could accomplish wonders in that regard. As it is, our corporate income tax is the highest in the developed world. Reducing the tax on business would almost certainly result in more businesses locating here and expanding. More businesses and more opportunities likely would entice millions to re-enter the labor force.