Retail sales in the first quarter of this year were obviously impacted by lower gasoline prices and bad weather. Both of those have faded in importance, however, so it's important to see if there has been any change in the underlying trends. As I see it, nothing much has changed. The economy continues to grow, but at a disappointingly slow pace compared to other recoveries. Many argue that this is the "new normal" and reflects durable demographic changes. I think demographics is only part of the story (they don't change dramatically from one year to the next), and the bigger story is the burden of government (high marginal tax rates, massive income redistribution, egregious regulatory burdens). These latter conditions don't have to be permanent, and can change for the better, so there is reason to hope for stronger growth in coming years.
The chart above shows nominal retail sales ex-Autos and Gasoline. This series has been growing at about a 4% annual rate since mid-2009. Sales today are almost 15% below where the could have been had the economy recovered back to its long-term trend. This is the measure of our discontent.
Oil prices have been extremely volatile since 1970, but in real terms they are now close to their average for the past 45 years. As the chart above suggests, big declines in the real price of oil have been reliably associated with a growing economy, and big increases in oil prices have almost always been followed by recessions. So it is reasonable to think that the weakness in retail sales in the first quarter will be followed by stronger growth in the current quarter. Money saved as a result of cheaper gasoline is likely to be spent on other things, and lower energy prices in general lower the economic hurdle rate for new economic activity.
That is a fascinating observation that increases in oil prices lead to recession in the United States. But in the past the Federal Reserve has raised rates in reaction to higher oil prices in an effort to combat inflation. The Fed may have learned that is exactly the wrong response. We will have to wait until the next round of oil price hikes to find out.
ReplyDeleteInflation has been ~1% lower from 2009 to today than from 1992-2008. Retails sales shown are nominal. Thus accounting for the difference, the real trend has likely not moved much (5% shown is nominal... an apples to oranges comparison)
ReplyDelete«I think demographics is only part of the story (they don't change dramatically from one year to the next)» Scott Grannis
ReplyDeleteThis may seem like an evident truth but it is truly a brilliant comment. It should remind us that demography is often a scapegoat for bad policies.
Blaming the weather is also a scape goat for bad policies.
ReplyDeletejm
Jake: your point (that inflation is lower in the current recovery than in the previous one) is valid. But the pattern of the chart of real retail sales looks identical to the one of nominal sales. The long-term trend for retails sales "control group," for example, is 2.9%. Real sales in March were about 12-13% below that trend, and they have been growing at about a 2% annual rate for the past 5-6 years.
ReplyDeleteSo it's the same story, even correcting for inflation: slower growth and growth that has failed to return to long-term trends.