Consumption: Full Steam Ahead

The American consumer has not yet showed any sign of slowing down, despite higher interest rates and slower house price appreciation. Today’s release of January retail sales by Census reported the following:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $365.4 billion, an increase of 2.3 percent (±0.7%) from the previous month and up 8.8 percent (±0.8%) from January 2005. Total sales for the November 2005 through January 2006 period were up 7.1 percent (±0.5%) from the same period a year ago. The November to December 2005 percent change was revised from +0.7 percent (±0.7%)* to +0.4 percent (±0.4%).

Retail trade sales were up 2.3 percent (±0.8%) from December 2005 and were up 8.5 percent (±0.8%) above last year. Gasoline station sales were up 22.7 percent (±3.1%) from January 2005 and sales of building material and garden equipment and supplies dealers were up 14.7 percent (±2.0%) from last year.

Though higher gas prices certainly played a role in the strong retail sales growth of 2005, price increases only account for part of the rise in spending. The following chart shows the 12-month change in retail sales once you subtract inflation. The red line shows total real retail sales excluding purchases of cars (which are very volatile due to incentives programs that come and go) and gasoline. For comparison, the green points show the 12-month growth in real personal consumption expenditures from the national income accounts, which is a slightly different measure of consumer spending since it does not focus specifically on retail purchases.

Note: Monthly series smoothed by taking 3-month averages, and both retail spending series were deflated using the appropriate CPI measure of inflation.

It seems clear that the US’s current (and quite impressive) consumption boom persisted all the way through 2005, with the slight slowdown in spending at the end of 2005 seemingly temporary and due primarily to autos.

Whether spending by consumers will be able to continue to power the US economy through 2006 remains to be seen, however, particularly given that real income growth is nearly stagnant. If households stop spending more than they are earning, consumption growth will probably have to slow from current rates of growth, perhaps substantially.