A bit of sunshine

Consumers say they’re gloomy, but why are they still spending?

A surprising report from the Commerce Department today, which indicated that seasonally adjusted nominal sales for retail trade and food services were 1% higher in May compared with April. The new estimates of March and April sales (in red in the figure below) were also revised substantially up from the previous (blue) estimates that had been reported last month.


Although a 1% monthly gain would translate into a 12% annual rate if maintained, the newly revised April numbers are still barely above the values last November in nominal terms. Calculated Risk notes that the year-on-year comparisons, when adjusted using an anticipated PCE deflator, remain negative even with the strong new estimates.


The latest numbers nevertheless lend support for Peter Hooper’s prediction that the fiscal rebate stimulus could give a sharp kick to spending. Greg Ip reports:

With today’s retail sales report, forecasters at Morgan Stanley have scrapped their longstanding call for the economy to shrink in the current quarter. The firm, whose continuously updated estimates of quarterly real GDP are closely watched, now sees it expanding at an annual rate of 0.5% in the current quarter, a shift from the previous call of minus 0.2%. This was primarily due to the stronger than expected retail sales report which led the firm to revise up its estimate of personal consumption growth to 1.6% from 0.2%. The firm said it also expects first quarter GDP growth to be revised up to 1.2% from 0.9%.

Economists David Greenlaw and Ted Wieseman confess to puzzlement at the strength in May and the upwardly revised months of March and April. “We doubt that the tax rebate checks had much impact on this report. Indeed, from an arithmetic standpoint, most of the upward adjustment to our [second quarter] estimates reflected the revisions to March and April– and, distribution of the checks did not even start until the end of April…. So where is all this spending coming from? We do not have a good answer to this question. The fundamentals still seem quite negative– income growth is moderating in conjunction with a deteriorating labor market, the wealth effect has swung from a source of support to a significant headwind, and every $1 rise in the price of a gallon of gasoline reduces discretionary spending power by about $120 billion (on an annualized basis)…. While the rebate checks should provide some noticeable support for the consumer over the next few months, we doubt the latest readings on retail sales can be sustained for too much longer.”

Phil Izzo collects some more pondering, but no definitive explanation, from other economists.

Originally published at Econbrowser and reproduced here with the author’s permission.

3 Responses to "A bit of sunshine"

  1. Guest   June 13, 2008 at 9:44 am

    Upward revisions to March and April retail sales may be because consumers boosted spending in those months in expectation of receiving the rebate. This would mean the effect of rebate on consumption and retail sales will fade away faster than expected.Also, past rebate evidence shows that consumers under financial strain, borrowing constrain tend to spend a larger proportion of the rebate. So in today’s scenario (food, gas prices, tighter borrowing) we can expect tax rebates boosting consumption, though what they spend on (gas stations, Walmart, etc) will also be important.

  2. Peter   June 21, 2008 at 1:50 pm

    I went to a Cheescake Factory the other day in Houston, one of the vibrant cities in the US, and there was no line and empty tables. Same with PF Changs. To make matters worse these companies are paying increased prices for their cost of goods, minimum wages have been raised by our idiotic representatives that do not understand Econ 101, and the cost of food and gas is skyrocketing. Even if oil stabilizes or lowers from here gas prices are going to continue to rise as they have not even kept up to any degree with the increase in the one and only input to make gas…oil. Oh, and don’t forget that retail sales include buying gas and food, so showing an increase in retail sales from $100 to $101 when an extra $5 was spent on the same amount of food and gas as the previous month is actually a decrease in sales of everything else. I am sure if you are selling shoes you are not too excited about an increase in overall retail sales because the consumer is using his shoe money to buy gas.The funniest thing about these idiotic tax rebates is not their name (what kind of idiot thinks that the government giving you back someone else’s money is a tax rebate)but rather the fact that demand side economics is for caveman. No one really believes they work. We tacked on hundreds of billions of dollars worth of debt to our children and in return we get a few billion in increased spending. The fact is that these moronic rebate checks are simply another payoff to the banks to save the scumbag bankers from more trouble. The majority of these checks are going either to pay off debt to banks or into saving accounts where banks can then use the money as their capital base. Open your eyes. Look around. What makes you think that the upper class spending middle class American can keep up. This country needs, and is getting, a wake up call and we are starting to get it in the form of higher oil prices. Our idiotic liberal representatives think that the way to fix our energy problem is only in alternative energies. Wrong. It is a little of everything, drilling, alternative, decreased consumption. Well luckily gas prices are causing demand destruction here. Plus demand destruction in air travel. When did Americans learn that paying forty grand for a crappy BMW is acceptable but they had a right to travel 3000 miles cross country in five hours for $150? Our population lives in a dream world where they have been told by socialist politicians that the government will take care of them so we have lost our basic survival instinct. How stupid to you have to be to take out a $350k mortgage on a $320k home, have $30k in debt on your SUV and anther $10k in credit card debt. More importantly, why is that my problem?Unfortunately middle class Americans do not have the right to live like upper class Americans, that is capitalism. If a family of four makes $60k a year you do not have the right to have two family vacations per year, two new cars every few years, new flat screens in every room, a boat and jet ski. It just does not work that way. You are supposed to work hard and sacrifice for these things, but we have been taught to expect them.In order to fix our problems we need to learn to live within our means, both the government and the population. High gas prices are a start. I pray they go up to $8-10 a gallon and I also would like to see a $2 a gallon gas tax that goes to our defense, as purchasing gas from hostile nations is a national security issue and contributes to our insecurity brought about by wealthy Middle East lunatic Muslims.Good luck thinking we are coming out of this soon because of a 1% rise in retail sales. Anyone who listens to this nonsense is probably also bummed they listed to the talking heads tell them we were going to have a second half recovery so they bought some Citi and Mer stock in May. Suckers.