Friday, February 12, 2010

Retail sales: a V-shaped, but sub-par recovery

Retail sales grew at a 7.9% annualized pace in the six months ending January. That's a pretty nice recovery. However, as the second chart shows, although sales are increasing at an above-trend pace, they are still about 12-13% below the levels that would have prevailed in the absence of a deep recession. We see the same pattern in GDP, which is about 9-10% below its trend. The gaps in both of these cases are substantial, but they are narrowing. In previous deep recessions, this gap narrowed quickly, thanks to very strong growth. This time it's likely to narrow more slowly, thanks to the huge increase in the size of government and income redistribution programs and the threat of higher tax rates in the future.

If Obama were really the "fierce advocate of free markets" that he says he is, he would have done things very differently last year. Instead of counting on massive income redistribution and big increases in government spending, he would have trusted free markets to pull the economy out of recession, and lowered marginal tax rates on income, capital, and corporate profits to get things jump-started. The deficit would have been much lower, and the economy much stronger. We're at a level of deficits now that are so high they are soaking up a major portion of the world's savings. If government weren't borrowing so much, the world's savings would be used by the private sector in a much more efficient and productive manner.


Seth said...

Federal borrowing yields next to nothing, yet is 'soaking up a major portion' of global savings? What does that say about investor confidence?

Also, what about the fact that the Fed is buying up so much of the new Treasury issues? Seems like a lot of that borrowing isn't (yet) even soaking up *ANY* current savings (only future tax revenue, future potential inflation, etc.).

Scott Grannis said...

STS: That's a point I've made quite a few times over the past year. The fact that investors are so willing to buy Treasuries yielding almost nothing implies a tremendous amount of risk aversion and general pessimism. The FEd has bought a lot of MBS ($850 billion so far), but only a small fraction (about $300 billion) of the net Treasury issuance. I would also note that the Fed's holdings of Treasuries today is almost identical to what it was before the crisis.

Stefano Bassi said...

Gallup Consumer Spending Data Refutes Commerce Department January Retail Sales Announcement

As if anyone needed more reasons to doubt the data coming out of our government. Earlier today the Commerce Department reported that January retail sales data came at a nice and bubbly 0.5% sequential increase, and an even nicer and bubblier 4.7% YoY. This presumably beat expectations which were looking for a sequential beat of 0.3%. Yet here comes the much more reliable Gallup data to throw some salt in yet another economic data fabrication. According to daily Gallup consumer polling, which due to its lack of proximity to the government propaganda complex is vastly more reliable, the January average data showed a decline of 5.8% over January 2009 and a whopping 16.3% decline over December. This is beginning to parallel the ever increasing divergence between the ABC consumer comfort index and the UMichigan index which lately seems to only track the average leve of the S&P over the prior month.

The chart below shows the true consumer spending behavior of Americans.

The gallup methodology is much more accurate than anything that could possible come out of the Commerce Department with its infinite data "adjustments."

Gallup's consumer spending measure tracks the average dollar amount Americans report spending or charging on a daily basis, not counting the purchase of a home, motor vehicle, or normal household bills. Respondents are asked to reflect on the day prior to being surveyed and results are presented here in both a 3-day and 14-day rolling average.

And here is how the Census Bureau determines its data:

The advance estimates are based on a subsample of the Census Bureau's full retail and food services sample. A stratified random sampling method is used to select approximately 5,000 retail and food services firms whose sales are then weighted and benchmarked to represent the complete universe of over three million retail and food services firms. Responding firms account for approximately 65% of the MARTS dollar volume estimate. For an explanation of the measures of sampling variability included in this report, please see the Reliability of Estimates section on the last page of this publication.

Feel free to decide whom you trust.

h/t Geoffrey Batt

Scott Grannis said...

I think it always pays to be distrustful of government data such as retail sales and GDP. The data is always subject to significant revisions after the fact. At best, it is an approximation of what is going on in the world. Seasonal adjustment factors are important, but imperfect. Nobody has perfect information in a country of 300 million inhabitants. I always prefer real-time market prices to government statistics.

Having said that, the Gallup data appears to me to be way too pessimistic based on all the other data series I track.

Unknown said...

Scott - I view the retail graph as very illustrative of the impact of the "new normal" in terms of consumer credit availability. Consumers no longer have ready access to home equity lines and refinancing to fund retail spending. This added 2-4 percentage points to GDP in the 2001-2007 time period and was suddenly taken away by the events of 2008. There are two pieces of good news in this: 1) the renewed upward growth, and 2) the inability of the consumer to increase home related debt. The bad news is that it will take much longer to get back to trend. Your thoughts?

Scott Grannis said...

Tom: Another way to interpret this is that with the federal government borrowing massive amounts of money, and redistributing equally massive amounts by force of taxation, there is simply much less money and credit available to the private sector. Government is effectively "crowding out" the consumer and small businessman; that is the problem of deficits on the order of 10% or so of GDP. This is also why I that it will take an unusually long time for the economy to recover the ground that it has lost in this recent recession.