Retail Outlook Through 2012: What We’ll See Is What We Got
9/30/2011
By Patrick J. O'Keefe, Director of Economic Research, J.H. Cohn
Retail sales
(chart 1) began rising before the recession “officially” ended in June 2009 and have been up in 25 of the last 29 months. In August, total sales were 2.4 percent higher than the pre-recession peak.
Despite a near-jobless recovery—total employment (chart 2) is up, nationally, less than one-half of one percent since the recession ended—August’s outlays were almost one-fifth (+18.3%) higher than at the nadir in March 2009.
Retail’s progress was somewhat less than those data suggest, however. When adjusted for inflation (chart 3), sales were shy of the peak hit in September 2007.
Sluggish growth has been the hallmark of this recovery. Indeed, recently revised estimates of real Gross Domestic Product (GDP) (chart 4) output—the inflation-adjusted sum of goods and services, show that two years after the recession’s end—output remained below its pre-recession total.
That GDP’s gap (-0.7%) was substantially less than retail’s (-4.1%) reflects differences in inflationary impacts over the past few years.
Although core inflation (chart 5) has been relatively calm, that has not been the case with the excluded items—energy and food—which comprise disproportionately large shares of retail sales. For consumer necessities [most notably gasoline (chart 6) ], prices—and merchants’ costs—have jumped sharply since the recovery began.
In other words, while inflation may not be generally problematic, higher prices for necessities are squeezing households and causing them to reallocate their spending. And this has impacted a broad swath of retailers.
Monetary authorities (viz., the Federal Reserve) do not see the recent acceleration in non-core inflation as a problem, largely because it has not insinuated itself into workers’ earnings.
But the combination of higher prices and stagnant real wages—inflation-adjusted hourly wages (chart 7) are only 1.4 percent higher than pre-recession—cut household purchasing power.
And that decline was compounded by an abjectly weak labor market.
As noted earlier, this has been a near-jobless recovery. As a consequence, there were 6.9 million fewer jobs in August than at the beginning of the downturn. And among those with jobs, almost nine million are underemployed (chart 8) (i.e., involuntary part-time workers).
Although beneficial, the slight increase in real hourly earnings was no antidote for an economy with fewer workers working fewer hours.
The combination of (1) stagnant real earnings (chart 9), (2) fewer jobs, and (3) higher underemployment means reduced purchasing power for working households, for whom the paycheck is the primary source of income.
The inflationary bite has been partially offset by the progress households have made in reducing their indebtedness (chart 10). This has cut the debt-related demands (chart 11) on after-tax incomes, freeing disbursable income for spending (chart 12) and saving (chart 13).
To be certain: consumer spending has improved only slowly. But what is more remarkable is that it has gained as much—and as steadily—as it has during a near-jobless recovery.
As 2011 enters its final quarter, the pace of growth is slowing—rather than accelerating as many had anticipated. That domestic deceleration, together with a resurgence of credit concerns and continuing fiscal stresses both here and in other advanced economies, has clearly taken a toll on consumer sentiment (chart 14).
Our outlook (chart 15) is that the erratic, slow-growth pattern (chart 16) of the past two years will continue at least through 2012. (This assumes no additional systemic shocks; although as noted above, financial stress is growing.)
For retail sales, our outlook remains mildly optimistic: We expect consumer
spending to grow in line with after-tax incomes.
But income growth depends on a resumption of private sector jobs growth, which has stumbled from an average of 140,000 net new jobs per month—positive but constrained by productivity enhancements (chart 17) (i.e., fewer employees per unit of output)—to a summer stall as employer confidence (chart 18) dwindled.
Our outlook is for total retail sales to rise gradually. But the long-term shift in how households shop will gradually alter the distribution of where transactions occur.
Consumers are increasing the amount and broadening the mix of shopping conducted through e-tailing (chart 19) —that is transactions conducted remotely via the internet or telephone.
As discussed above, August’s sales (chart 20) surpassed the November 2007 peak, by 2.4 percent. But the gains have been uneven.
Auto sales (chart 21) —despite a sustained rebound—remain below (-13.5%) pre-recession levels; but gasoline sales recorded an aboveaverage (+6.8%) gain.
August’s e-tailing sales, on the other hand, were 28.3 percent higher than in November 2007. While still a relatively small share (7.2%) of total sales, e-tailing is expanding rapidly (chart 22) .
To summarize: the general economy continues to recover slowly and unevenly. Further, the expansion faces a number of global and domestic challenges (viz ., financial stresses, fiscal imbalances) that could possibly—although not inevitably—disrupt the expansion.
Assuming no systemic shocks, retail should continue to perform as it has over the past two years: increasing gradually as jobs and incomes grow during a continuing erratic, slow-growth expansion.
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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. He can be reached at pokeefe@jhcohn.com or 1-877-704-3500.
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