Thursday, April 15, 2010

An auspicious sign: the consumer (for now) is back

I remain very skeptical about the sustainability of the recovery, as the labor market is in shambles and nominal wage growth is unlikely to facilitate “healthy” deleveraging - please see this recent post “Reducing household financial leverage: the easy way and the hard way”. I digress; because you can't fight the data. And for now, the consumer is back.

The latest retail sales figures reveal two bits of information worth noting. First, autos were a big factor in the March 2010 surge. Second, even though the large contribution from motor vehicles and parts compromises my enthusiasm somewhat, the underlying trend has emerged: consumers are less frugal in spite of income constraints.

The March advanced retail sales report was genuinely strong, 7.6% annual pace since March of last year or 1.6% over the month and seasonally adjusted. At first I thought that this heroic sales growth was just a scam. March auto sales were unusually large in response to the competitive pricing during the peak of the Toyota scandal. See’s preview of the March light weight vehicle sales that registered a large 11.75mn gain.

And in reality, the March number was driven largely by auto sales, contributing 1.1% to the 1.6% monthly growth in retail sales. Furthermore, 36% of the total sales bill drove 5.7% of the 7.6% annual gain: nonstore retailers, motor vehicles and parts, and gasoline stations.

One could stop there (which I almost did); but upon further examination, a real trend is breaking out: the growth is broadening across categories with each month that passes. Just look at the evolution since January 2010 (after revisions, of course).

The charts illustrate the sequential contributions to growth from each major category in the advanced retail sales report from left (January 2010) to right (February 2010) to lower left (March 2010). The number next to the date for each chart (title) is the annual total retail sales growth, and you can find the data at the census website here.

You might ask yourself now, what do retail sales look like when conditioning for the robust growth in nonstore retailers, motor vehicles and parts, and gasoline stations? What’s happening to the other 64% of sales? Here’s where the green shoots become even more evident.

The trajectory of retail sales ex nonstore retailers, motor vehicles and parts, and gasoline stations is more of the 60-degree type, an auspicious sign for the near-term recovery.

However, as I have stated time and time again, further deleveraging is imminent. Whether that happens through default or through income growth is all the same in the aggregate - that is, until default causes further macroeconomic instability. Until the economy generates income enough to pay down leverage, the risk of a double dip remains as the inventory cycle is laid to rest. Economic momentum is gaining; let’s just hope that policymakers don’t screw it up.

Here's something of interest: our friend rjs is looking at a sales tax conundrum....

Rebecca Wilder


  1. I was thinking of the large percentage of people who will/are receiving their tax refunds right now - that will drive up consumption for the time being - this was a comment on the ris site, too. Or, have they learned to bank a bit of it. The whole upward trend for consumption makes no sense.

  2. Hi Rebecca - there is a comment war of sorts over at The Big Picture (Barry Ritholtz's site) over what can be driving the spending increase, particularly since Q4 2009.  Many are suggesting the missed mortgage payments are the driver, along with a reduced savings rates.

    Ritholtz claims the missed mortgage payments can't explain that because that phenomenon has been around awhile, so why would it just be showing up now.

    I was wondering if you had thoughts on what is driving this since, as you note, there is not much in the way of wage or labor market improvement.

  3. Yes, I saw this string.

    The fact is, that the US economy has not been in this position for 80 years, so the observable data is slim. But what I do know is that government transfers are driving nominal income growth, propping up spending and saving. I imagine that delinquency-found disposable income is some of the spending motive. But the dominant forces are likely twofold: (1) lagged wealth effects are wearing off for upper income earners, and (2) the pent-up demand across all income levels is dominating the motive to save at this stage in the cycle.

    Furthermore, I do not expect this trend to last. As government tranfers expire, the true state of private wage growth will be revealed. And at that point, consumers will likely strive to save more.


  4. im used to dealing with my conundrums in relative obscurity, rebecca, but your exposure of this one drove so much traffic to my post i figured i'd better make sure i had my ducks in a row...for those who didnt understand my ambiguous post, what ive been catching in my peripheral vision over the past year has been a disconnect between what ive seen in the occasional state sales tax reports i link to and the retail sales i see reported monthly...i never followed up on it, after all, one or two states sales tax receipts could be outliers, and there was usually a lag before sales taxes were reported anyhow...but this disconnect persisted, and <span>on thursday</span> i ran into a texas YoY negative 7.8% sales tax report for march, the same month these retail sales gains of 7.6% YoY were being reported...i had one commenter suggest the discrepancy might be due to untaxed internet sales, but i dug up <span><span>this esales report</span></span>: which forecast  2010 US retail e-commerce sales to climb by 12.7% on volume of $152 billion... based on march retail sales of $363B, i estimated we would see over $4 1/2 trillion sales for the we're talking e-sales that would be less than 3 1/2 % of total, and as rebecca had pointed out, some of those are taxed... the most recent apples to apples national comparison i could find was for the 4th qtr, 2009: <span>this report</span> which said total sales for the October through December 2009 period were up 1.9 percent (±0.3%) from the same period a year ago, whereas <span>the commerce dept news release gave</span> a quarterly increase of 7% on an annualized basis...<span></span> then i also found <span>this state revenue report from the rockefeller institute of government</span>, a 31 pp PDF... the detailed sales tax breakouts are on pp 15 & 16... 
    the summary, copying from p 6&7:
    <span>State sales tax collections</span> in the October-December 2009 quarter were down 5.3 percent from the same quarter in 2008, and 11.3 percent from the same period two years earlier. This decline is the mildest since the start of the 2007 recession but still far worse than declines in the previous recession. After adjusting for inflation using the <span>gross domestic product price</span> index, <span>state sales tax revenue</span> declined by 5.9 percent in the October-December quarter of 2009.
    Sales tax declines were reported in all regions but New England. The Southwest had the largest decline at 15.2 percent, followed by the Rocky Mountain at 3.9 percent. The New England region was the only region reporting growth in sales <span>tax revenue collections</span> in the fourth quarter at 4.8 percent. However, Massachusetts was the only state in the region reporting sales tax growth, mostly attributable to legislated changes. If we exclude Massachusetts from the region, sales tax collections in New England show a 6.2 percent decline.
    Forty-one of 45 states with broad-based sales taxes had declines, and ten states had double-digit declines. Massachusetts had the largest increase at 20.8 percent, followed by <span>North Carolina</span> at [...]

  5.  an article that quantifies the tax refund impact:

    <span><span>Extra Tax Refunds Giving Consumers A Short-Term Boost</span> </span>- Amid all the optimism that the consumer is back, it’s worth considering one of the reasons why: a huge tax refund season.As the economy was nose-diving last spring, most people probably overlooked the record-smashing $259 billion in refunds awarded (as of April 24) — roughly <span>$40 billion, or 17% ahead of the 2008 tax season</span>. Back then, panic was in the air, consumers were retrenching and the refunds acted as a Band-Aid on an open wound. But this year, with an economic upturn under way, an even more rewarding tax season is serving more as a vitamin boost. New IRS data out Friday show that refunds are <span>running about $10 billion ahead of last year’s record pace</span>, even though the agency has processed 4% fewer returns. That means refunds are running about $50 billion ahead of 2008 levels — hardly chump change. If you consider that the bulk of refunds are doled out within a three-month period (though spread out between the first and second quarter), the extra refunds amount to an annualized 1.3% of GDP.What’s more, as <span>IBD previously reported (subscription required)</span>, the Joint Committee on Taxation has estimated that people who don’t pay income tax are receiving an <span>extra $30 billion in refundable credits</span> courtesy of the Recovery Act.


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