Economic Notes: Shopping Like There Is a Tomorrow
2/21/2011
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
Retail sales
rose for the seventh consecutive month in January and, after having increased 14.8% from the cyclic bottom, are within a whisker of the pre-recession peak in November 2007. (These data have not been adjusted for inflation.)
Shoppers may be spending as much as they did three-plus years ago, but they are doing so differently.
The pre-recession autumn of 2007 was the twilight of the shop-to-you drop, burn-what-you-earn, charge-it-large bubble world. Households saved little and charged a lot. They shopped like there was no tomorrow.
Then, the bubble burst, net worth evaporated and, in the ensuing recession, consumer spending cratered. (Yes, Virginia, there is a Grinch.)
Even though the recovery that began mid-2009 has been sluggish—and job growth glacial—incomes have increased steadily and, achieved a new peak at year’s end (but not quite, if adjusted for inflation).
But working households whose incomes (and, therefore, spending) are more dependent on paychecks have not kept up. During this job-loss recovery [See: “Snow, Statistics, and a Job-Loss Recovery”], paychecks have not grown as rapidly as other sources of income (e.g., public transfers, pensions, and proprietors’ income).
Where after-tax incomes in toto have increased 4.3 percent since the recession ended, the earnings component (i.e., wage and salary disbursements) has risen less (+3.6%) and has yet to return to pre-recession levels. (Throughout 2010, earnings contributed the smallest proportion of after-tax incomes since recordkeeping began in 1959.)
Rather than spending the entirety of their income gains, however, households have generally saved more, charged less, and paid down credit card balances since the financial panic began mid-2008. (Non-revolving debts, largely auto and student loans, also declined during the downturn; but, on five monthly gains through December, outstanding balances have surpassed the pre-recession high.)
Hence, retail’s two-speed recovery reflect shifts in what households—particularly working households—are purchasing, where they are shopping, and how they are paying. The expectation is that some aspect of these shifts will persist even after job growth accelerates, but two warrant particular attention.
First, the decline in credit-financed consumption (i.e., credit card balances) may be nearing its end. December was the first month since August 2008 in which card balances rose. It is possible that the downward adjustment has over-shot and that a near-term correction (i.e., uptick) is probable. But it is highly unlikely—particularly in light of expanded regulations—that credit card balances will rebound robustly in the foreseeable future.
The second shift that is likely to endure—indeed accelerate—is long-term evolution in how (and, therefore, where) consumers shop, specifically: the growth of e-tailing (i.e., “nonstore” sales transacted via phone or internet)—including conventional retailers’ e-tail hybrid (i.e., bricks, sticks, and clicks), which is not captured fully in the data below.
Over the past decade, e-tailing has expanded dramatically faster than retail sales generally. It was the only sales channel to show consistent growth throughout the contraction and has gained market share as a consequence. All of the evidence suggests that this trend will continue—although the pace may slacken a bit—with implications within the sales sector as well as for real estate and employment.
As noted earlier, after-tax incomes have recovered, but growth remains constrained—which is also the case with consumer credit. Consequently, consumers may find it necessary to reallocate their spending in response to higher prices for essentials (e.g., food and gasoline). Similarly, the deferred replacement of households’ aging autos may impinge on spending elsewhere.
These may prove to be one-off (i.e., nonrecurring) adjustments, with little/no impact on the longer-term profile of household spending. But they bear watching. Not because of the risk of accelerating inflation—which is likely, although not imminent—but because their persistence may diminish spending on less-pressing budget items.
Today’s consumers are more alert to what they can afford to buy and more aware of what they can afford to borrow. Yet it is reasonable to expect households to become less cost conscious and debt adverse as the economy—and particularly the jobs market—expands.
But while consumer sentiment has improved over the course of the recovery, it is still subdued.
Today’s households are spending like there is a tomorrow.
***
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.