Economic Notes: A Good Ending
12/21/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
The Federal government has temporarily extended its current tax regime in a legislative compromise that also authorized inter alia investment incentives, reduced payroll taxes, and continued benefits for the long-term unemployed.
The compromise forestalled a tax increase, which would have throttled the recovery. Its other components will boost spending and investment, which should bolster a sluggish recovery.
The costs of the compromise will increase the Federal deficit well beyond last year’s 37.4% of total outlays. So even as the compromise provides some immediate economic benefits, it compounds the nation’s longer term fiscal difficulties.
While policymakers dithered, households assumed that a compromise would be reached and increased spending in advance of the holidays.
Retail sales rose for the fifth consecutive month in November, to within a hair’s breadth (-0.2%) of the January 2008 peak.
The virtual round-trip in retail spending has involved some significant changes, however.
There has been a shift in the retail mix. Compared to when the recession began, spending on autos and gasoline has declined by 11.5%. Net of cars and gas, total sales are up 5.2% from their pre-recession levels.
There has also been a shift in the mode of shopping, with e-tailing (i.e., online shopping) 27.2% higher in November than when the downturn started, compared to an in-store sales increase of 3.2%.
This modal shift has accelerated during the retail recovery that began in April 2009. While e-tailing comprised less than one-tenth (8.6%) of all sales (net of autos and gas) at the start of the turnaround, it has accounted for more than one-third (35.0%) of the gains during the rebound.
The shift to e-tailing has implications for the broader recovery, particularly as it affects employment – retail employment is 7.3% below its pre-recession peak and less than at the start of the turnaround – and commercial real estate.
As noted above, spending on autos and gasoline is still 11.5% below where it stood at the beginning of the contraction. The auto drop is due to fewer sales, while gasoline to lower prices (recent volume is above that of December 2007).
The recent rise in gasoline prices (11.0% since Labor Day) has the potential to squeeze discretionary consumer spending – particularly given the tepid growth in income due to a weak labor market. (Wage and salary disbursements are still two percent below the early 2008 peak.)
The expectation here is for jobs growth to accelerate in the coming months. Support for that view can be found in the Institute for Supply ManagementTM (ISM) surveys, which are a reliable indicator of the near term trend (i.e., six month horizon).
Those data are moderately optimistic and suggest that hiring should increase during the first half of 2011. A good note on which to conclude.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.