Economic Notes: Sluggish is Modest
1/18/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
Retail sales
finished 2009 on a flat note (-0.3% in December), but managed a partial recovery from 2008’s meltdown. Still, 2009’s cumulative total was the lowest since 2005.
For two consecutive months, sales have exceeded prior year levels. But this is not the start of a new spending spree. Instead, December’s 5.4% annual gain (y/y) reflected a new consumer: one who purchased necessities and took advantage of bargains.
Almost one-half (48.3%) of the y/y increase was due to rising gasoline prices. Increased auto sales, bolstered by dealer incentives, accounted for nearly one-fifth (18.9%) of the y/y gain. And “nonstore” sales, sweetened by discounts and incentives (e.g., free shipping), contributed 13.3% of the y/y increase.
The remaining one-fifth (19.5%) of the over-the-year rise was broadly distributed. Of all of the reported subsectors, only furniture/furnishings and building materials were down y/y.
Unlike 2008, retailers entered the holiday sales season with lean inventories and tight payrolls, having added far fewer workers than usual. This should benefit bottom lines and reduce post-holiday layoffs, both to the benefit of the broader economy.
The sluggishness in retail sales – and the sector’s outlook – is readily explained by the weakness in workers’ incomes.
Workers’ wages fell 3.9% between October 2008 and March 2009, when the economy shed 3.7 million jobs. Wage and salary disbursements have increased consistently since, but the gains have been grudging. November’s disbursements were 2.3% below the prior year’s – and inflation has eroded the purchasing power of those diminished earnings.
After-tax incomes have, however, increased steadily from mid- 2009, fully recovering the earlier-in-the-year drop. But those gains were derived primarily from increased transfers and lower taxes, which households spend, but less freely than when jobs are plentiful and earnings are increasing.
Summarizing the view from Main Street at the end of December, the Federal Reserve’s Beige Book observes that “while economic activity remains at a low level, conditions have improved modestly.”
To be certain, sluggish is modest.
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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.