Economic Notes: If We Make It, Will They Buy?
10/19/2009
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
From the business sector’s version of Field of Dreams: “If we make it, will they buy?”
Industrial output grew smartly (+5.2%) in the third quarter (2009 Q-3), recording its first quarterly gain since a small blip in 2008 Q-1. The gains flow from a sustained increase in factory utilization rates, which has been driven to some considerable degree by the reopening of the nation’s auto plants.
These are welcome developments, as the goods-producing sectors (factories plus construction) accounted for a disproportionate share of the current contraction. And replenishing inventories – by manufacturers and merchants alike – should provide substantial impetus to the nascent recovery.
Producers and sellers can be expected to restock cautiously, however. Two years of subpar sales and continuing credit constraints assure it. Indeed, even though total business inventories are 13.3% smaller than a year ago, the ratio of inventory to sales remains at elevated levels – because sales remain subdued.
Retail sales declined in September. This was expected due to the demise of the “cash for clunkers” incentives. Absent the drop in auto sales, total retail and food service sales were up marginally (+0.5%), owing to gains in general merchandise, gasoline, and restaurants. But year-on-year, general retail sales(i.e., excluding cars and restaurants) were down by 7.2%
According to the most recent Reuters/University of Michigan survey of consumer sentiment, households remain uncertain in their outlook. This is unsurprising in light of persistent weakness in the labor market, and flat earnings and incomes.
While personal income did rise in 2009 Q-2, for the first time in a year, the gains were nugatory (+0.2%) and resulted entirely from growth in transfer payments (e.g., unemployment insurance, Social Security), while compensation and investment incomes declined. In the long run, rising compensation, rather than transfers, is more likely to encourage higher consumer spending.
So, even as manufacturers and merchants restock their shelves, the sales data give them cause to wonder: if we make it, will they buy?
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