An auspicious sign: the consumer (for now) is back
I remain very skeptical about the sustainability of the recovery, as the labor market is in shambles and nominal wage growth is unlikely to facilitate “healthy” deleveraging – please see this recent post “Reducing household financial leverage: the easy way and the hard way”. I digress; because you can’t fight the data. And for now, the consumer is back.
The latest retail sales figures reveal two bits of information worth noting. First, autos were a big factor in the March 2010 surge. Second, even though the large contribution from motor vehicles and parts compromises my enthusiasm somewhat, the underlying trend has emerged: consumers are less frugal in spite of income constraints.
The March advanced retail sales report was genuinely strong, 7.6% annual pace since March of last year or 1.6% over the month and seasonally adjusted. At first I thought that this heroic sales growth was just a scam. March auto sales were unusually large in response to the competitive pricing during the peak of the Toyota scandal. See Edmunds.com’s preview of the March light weight vehicle sales that registered a large 11.75mn gain.
And in reality, the March number was driven largely by auto sales, contributing 1.1% to the 1.6% monthly growth in retail sales. Furthermore, 36% of the total sales bill drove 5.7% of the 7.6% annual gain: nonstore retailers, motor vehicles and parts, and gasoline stations.
One could stop there (which I almost did); but upon further examination, a real trend is breaking out: the growth is broadening across categories with each month that passes. Just look at the evolution since January 2010 (after revisions, of course).
The charts illustrate the sequential contributions to growth from each major category in the advanced retail sales report from left (January 2010) to right (February 2010) to lower left (March 2010). The number next to the date for each chart (title) is the annual total retail sales growth, and you can find the data at the census website here.
You might ask yourself now, what do retail sales look like when conditioning for the robust growth in nonstore retailers, motor vehicles and parts, and gasoline stations? What’s happening to the other 64% of sales? Here’s where the green shoots become even more evident.
The trajectory of retail sales ex nonstore retailers, motor vehicles and parts, and gasoline stations is more of the 60-degree type, an auspicious sign for the near-term recovery.
However, as I have stated time and time again, further deleveraging is imminent. Whether that happens through default or through income growth is all the same in the aggregate – that is, until default causes further macroeconomic instability. Until the economy generates income enough to pay down leverage, the risk of a double dip remains as the inventory cycle is laid to rest. Economic momentum is gaining; let’s just hope that policymakers don’t screw it up.
Here’s something of interest: our friend rjs is looking at a sales tax conundrum….
Rebecca Wilder
It’s difficult to get current numbers from states. Some states are reporting growth in sales tax receipts – but it very choppy. NY is reporting a 4% rise in Q1 2010 (calendar) sales tax receipts, but upstate counties are still down (mini-spending boom in NYC?).
http://www.wgrz.com/news/local/story.aspx?storyid=76044&catid=13
Apparently other states are reporting increases from what they forecast earlier
http://www.businessweek.com/news/2010-03-30/california-revenue-shows-state-cash-collapse-ending-update1-.html
Also, I think the state reporting lags the economic releases.
um…. ok. Now if we could just figure out how many of these consumers are spending because of strategic default you might have something here…
http://www.nakedcapitalism.com/2010/04/strategic-defaults-increase-consumer-spending.html
Good point. Edward Harrison has been pushing this for a while now. Here’s an article by an industry participant, essentially arguing the same thing.
If you’re not paying mortgage, then disposable income is much larger. Actually, I would guess that it is the delinquent homeowners that are really stepping up to the spending plate. I hear that banks are putting off foreclosures for various logistical reasons; but that certainly acts as a transient incentive to spend. No court fees to pay; no paperwork to fill out; just not paying; still living in my home for free; why not spend?
Rebecca
The savings rate is heading towards 0 again and there have been substantial withdrawals of MM funds that apparently have not been rotated into bonds or stocks.
I suppose this is all seems good to people that worry about “the paradox of thrift” but my guess is it is not good news.
Sure. A new iPad or vehicle is probably just the thing to chase those “about to be homeless” blues away.
And are the great thinkers and policy makers going to see this “strategic” play for what it is? Robbing Peter to pay Paul?
Texas is actually doing the worst of all of the big states, and perhaps all of the states.
Many states that had negative revenues a few months ago have turned positive in the interim. Check out California, NY, NJ, PA, and Ohio as a few.
I think your going to see another constriction of consumer credit in the next 6 mos if the Fed allows is numerous facilities to sunset. but for right now I think the sensical move by americans to stop paying their mortgage has freed up money for discretionary spending. Before it was the home equity loan industry allowing americans to use homes as ATM to fuel consumption and now it is the strategic default of homeowners using monies for mortgage to fuel consumption. Interesting stuff and now that banks are unlaoding homes in auction and speeding up rate of foreclosure, the remaining home owners with equity will see that drop, realize they are only renters with no equity interest and with that more strategic defaults. Tis should all be very interesting
There are some estimates circulating regarding the dollar value of mortgage non-payment. Those estimates turn out to be fairly small relative to the $9 trillion in annual consumer spending in the US. It is certainly an element, but perhaps not a large one. Strategic defaults could free up the entire amount, but for defaults that represent the loss of a job, family income has often fallen below monthly expenses, so less than the entire amount of the defaulted mortgage payment is available for other forms of spending. In fact, a prudent strategic defaulter would save some of the mortgage payment, in case there is a sudden need for quick cash – which seems plausible.
The top quintile of income accounts for about half of consumer demand. ARRA support for household budgets, in the form of direct payments and tax benefits, goes mostly to the lower 4 quintiles. So ARRA probably accounts for a part of the strength in sales. The CEA, in its latest ARRA review, took the position that household spending might still be falling if it had mot been for ARRA. I vaguely recall that estimates of the value of mortgage defaults and of ARRA support to households are of the same order of magnitude.
There was an unusual pattern between spending and income in this latest recession. Typically, spending falls less than income. Certainly, that was the case in the last couple of shallow recessions. This time, spending fell more. That may have offered a bit of room for a rebound in spending that did nto rely on a change in the flow of income. To the extent that the recent gain in sales represents a rebound from last year’s spending undershoot, it does not promise much more than a higher base on which to build with whatever happens to disposable income from here. Once the bounce is done, the path of spending growth should flatten out.
As to the point about banks holding back on foreclosures, the March data suggest forebearance has run its course. One BofA official recently told a California real estate audience that BofA foreclosures would rise six-fold by December. So those defaulters who have been contributing “mortgage” money to retail sales may soon have to devote it to rent.
Hi kharris,
Great point; and one that should be made more often: there is very relevant pent-up demand out there. But today’s UMich report on consumer sentiment showed the expectations component sliding again. Generally, the expectations component, which has declined every month since January, has a higher correlation with consumer spending than does the current component. The pent-up demand, therefore, may be short-lived.
I expect that consumers are transitioning toward a model of higher saving, but the pent-up demand is dominant at this point. But the (fiscally generated) nominal income must be there in order to prevent the deflationary pressures from taking hold.
Two days ago we spoke about government deficit financing consumer spending and underpinning the economy, which in turn led has led to better-than-expected income tax receipt growth – ARRA. I have pointed out before that nominal income growth without the transfers is, on average, negative ove the year. This is consistent with the ARRA driving consumption story. The thing that I worry about is the government pulling back too early (not so much exiting but even just allowing programs, like extending unemployment benefits for example, to expire). Much, much more deficit spending is needed to balance the macroeconomy without mass default and further macroeconomic disruptions.
Oh, this chart speaks to your point about the large hit to spending over the latest cycle (although I am not sure that the graph I manipulated will present itself).
http://research.stlouisfed.org/fred2/graph/?id=PCECCA
Rebecca
I suspect the thing you have to look at is how retail sales are skewed so heavily towards the upper income demographics. Normally, at bottoms retail sales growth actually lead income growth. What we always seems to get is that spending by the higher income groups during hard times is constrained by uncertainty — am I going to lose my job and/or income. But once the point of major lay-offs ends so that upper middle class consumers no longer are that worried about losing their job/income they start to loosen their purse strings and retail sales rebound.
This time we had an unusually large drop in consumer spending so the potential for this upper income demographic to resume spending is also particularly large. Moreover, this demographic is also benefiting from the very low inflation numbers.
But my bottom line is that the more I look at the recent strength n consumer spending the more and more it looks like a perfectly normal cyclical bottom/rebound.
Im wondering if it can accurately be called robbing peter. Peter already got his bailout and has been made whole so to speak. Paul is possibly being allowed to stop paying for a while and will eventually have the debt forgiven. Is it a bad strategy? Debt forgiveness was always going to be part of the picture. Too many debts could have never been paid any way. Maybe if you just let people think they are getting away with something and dont simply announce a debt jubilee it can be a little less chaotic. I dont know.
I certainly do not begrudge people from walking away from a house they can no longer afford. I dont like the idea of people who can afford just stopping but hey this would not be the first time Americans have welched on a deal. Corporations have done it all the time and now they are people too.
It looks like the things have stopped getting worse, but the automobile thing is worrisome. To a great extent automobile ownership isn’t optional and at some point, it becomes difficult to squeeze more miles out of a junker. March sales were probably boosted by unusually large incentives — especially from Toyota. It’ll take a few months to see if the increased sales are sustainable. I don’t think many folks are buying tricked out SUVs this year because they are tired of the upholstery in the old one. and there is some chance that auto sales are being driven more by necessity than an abundance of consumer confidence. If so, they may not increase much and might even fade.
Fortunately, about 80% of workers did not lose their jobs, and people retained pensions and etc. They can continue servicing their debts, and now that financial armageddon has passed, consumers can continue spending.
Economic activity will continue at a level lower than during the big bubble, for as long as debt can be serviced, and as long as losses resulting from bad debt can be absorbed by creditors. Or taxpayers. Or consumers. Or somebody.
Although we are slowly losing our economic base, finance is picking up the slack. I am confident that the consumer, and we in general, will make it to the next bubble. I eagerly await and anticipate the coming of the next bubble.
The easiest way is to do a strategic mortgage default, ie you can service the $2000/month loan but chose to walk and rent for $800/month wala $1200/ month for mindless consumption.
This market is heading down, said site below on April 15, 2010. One day later Goldman news came as a “surprise”. Today it is confirmed!
http://financialtraders.blogspot.com/2010/04/sp500-dow-nasdaq-100-stock-market.html
They release negative news to move market down, while average Joe will now buy on “retreats” thinking he is getting a deal.
http://www.ritholtz.com/blog/2010/04/are-defaults-driving-retail-spending/
I acknowledge the evidence is anecdotal. I hope the ease of finding it is based on the outrage and exaggeration of retelling not something else.
The thing that bothers me is that if this was a significant trend it would probably be notoriously difficult to measure. Not likely the participants would acknowledge their behavior in any way that makes them identifiable.
by way of clarifying, for those who didnt understand my ambiguous post, which rebecca refers to above as my conundrum…what ive been catching in my peripheral vision over the past year has been a disconnect between what ive seen in the occasional state sales tax reports i link to and the retail sales i see reported monthly…i never followed up on it, after all, one or two states sales tax receipts could be outliers, and there was usually a lag before sales taxes were reported anyhow…but this disconnect persisted, and on thursday i ran into a texas YoY negative 7.8% sales tax report for march, the same month these retail sales gains of 7.6% YoY were being reported… one commenter suggested the discrepancy might be due to untaxed internet sales, but i dug up this esales report which forecast 2010 US retail e-commerce sales to climb by 12.7% on volume of $152 billion… based on march retail sales of $363B, i estimated we would see over $4 1/2 trillion sales for the year…so we’re talking e-sales that would be less than 3 1/2 % of total, and as rebecca had pointed out, some of those have sales tax applied anyway… the most recent apples to apples national comparison i could find was for the 4th qtr, 2009: this report said total sales for the October through December 2009 period were up 1.9 percent (±0.3%) from the same period a year ago, whereas the commerce dept news release gave a quarterly increase of 7% on an annualized basis… then i also found this state revenue report from the rockefeller institute of government, a 31 pp PDF… the detailed state sales tax breakouts are on pp 15 & 16…
from the summary, & copying from p 6&7:
State sales tax collections in the October-December 2009 quarter were down 5.3 percent from the same quarter in 2008, and 11.3 percent from the same period two years earlier. This decline is the mildest since the start of the 2007 recession but still far worse than declines in the previous recession. After adjusting for inflation using the gross domestic product price index, state sales tax revenue declined by 5.9 percent in the October-December quarter of 2009.
Sales tax declines were reported in all regions but New England. The Southwest had the largest decline at 15.2 percent, followed by the Rocky Mountain at 3.9 percent. The New England region was the only region reporting growth in sales tax revenue collections in the fourth quarter at 4.8 percent. However, Massachusetts was the only state in the region reporting sales tax growth, mostly attributable to legislated changes. If we exclude Massachusetts from the region, sales tax collections in New England show a 6.2 percent decline.
Forty-one of 45 states with broad-based sales taxes had declines, and ten states had double-digit declines. Massachusetts had the largest increase at 20.8 percent, followed by […]
Two words: tax refunds. Boosted by the Homebuyer, Making Work Pay credits, and Residential Energy credits, and accompanied by the state-administered Appliance tax credits, tax refunds are putting a little more money in people’s pockets. Unfortunately, another reason for increased refunds, which in no way could be construed as economically positive, is lower reportable income due to business downturn or employee layoff during the year.
I drive by two malls on the way to work, and they have been packed on Saturdays, comparable to if not even more than a typical Christmas season. These are working people spending their refund checks.
The reason Ive been going to work on a Saturday is that I prepare tax returns, and while I mostly prepare (review) high-income taxpayers’ returns, whose results are not that much changed from previous years, the middle and lower income returns I’ve come across have had refunds unlike I have ever seen, due to the reasons discussed above. It is also the best argument for why graduated tax rates are necessary – to give those at the middle and lower rungs an opportunity to put a spark in the economy, too. The rich can only use so many toasters.
Obviously, it’s a temporary thing and any long-term benefit illusory, with high unemployment continuing, more state and local governments maxing out on their debt, and the “too big to fails” resuming their party.
http://www.zerohedge.com/article/step-aside-roubini-fx-concepts-john-taylor-new-dr-doom-2011-will-be-worse-2008
rollotomasi,
great handle, but I couldn’t agree more on the tax rebate effect on retail numbers. Consumers are such lemmings, money burns a hole in their pocket. Too much has changed by the forced deleveraging of the consumer for spending to return to any recent historical baseline any time soon. The rebound will be slow, uneven and unprecedented. I don’t care how much discretionary income the top quartile has. I think all of us who care will be suprised by how much the overconsumption of the average consumer has been taken for granted. It will only be realized when it is gone . So time will tell.
here’s an article that quantifies the tax refund effect:
Extra Tax Refunds Giving Consumers A Short-Term Boost – Amid all the optimism that the consumer is back, it’s worth considering one of the reasons why: a huge tax refund season.As the economy was nose-diving last spring, most people probably overlooked the record-smashing $259 billion in refunds awarded (as of April 24) — roughly $40 billion, or 17% ahead of the 2008 tax season. Back then, panic was in the air, consumers were retrenching and the refunds acted as a Band-Aid on an open wound. But this year, with an economic upturn under way, an even more rewarding tax season is serving more as a vitamin boost. New IRS data out Friday show that refunds are running about $10 billion ahead of last year’s record pace, even though the agency has processed 4% fewer returns. That means refunds are running about $50 billion ahead of 2008 levels — hardly chump change. If you consider that the bulk of refunds are doled out within a three-month period (though spread out between the first and second quarter), the extra refunds amount to an annualized 1.3% of GDP.What’s more, as IBD previously reported (subscription required), the Joint Committee on Taxation has estimated that people who don’t pay income tax are receiving an extra $30 billion in refundable credits courtesy of the Recovery Act.