Retail sales beat, but still not impressive

October retail sales growth was a good deal stronger than expected (+0.4% vs. +0.1%), but from a longer-term perspective, sales growth is only modest and still substantially below trend. This is consistent with a slow-growing economy that nevertheless is managing to overcome significant headwinds (e.g., the government shutdown, very weak labor force participation, widespread risk aversion on the part of consumers, banks, and businesses, a very burdensome regulatory environment, and high marginal tax rates on income and capital) to continue to grow. It's amazing, really, that the economy is doing as well as it is. If these headwinds could be reversed, there's no telling how strong the economy might be.

This chart shows the retail sales "Control Group," which strips out the most volatile sectors (autos, building materials and gas stations). Here we see steady growth, but at an unremarkable pace. Like the overall economy, sales activity is at least 10% below where it otherwise might be if the prior long-term trend were still in place.

The lackluster performance of the economy can be almost completely explained by the lack of growth in the labor force (those working and looking for work). Upwards of 10 million people have "dropped out" of the labor force, giving up in their search for jobs. This can be traced in part to an increase in government transfer payments (e.g., extended unemployment benefits, easier-to-get food stamps, more people on disability, higher marginal tax rates which fund increased tax subsidies, and so-called stimulus spending, all of which reward the lack of work), higher minimum wages (which make it harder for businesses to hire), and the increased burdens and uncertainties that have arisen with the coming launch of ObamaCare (which have made small businesses reluctant to expand), to name a few.