This morning’s retail sales report will surprise no one who’s been watching the economy this year, but the trend is still disturbing.
Estimated monthly sales for retail and food services on a seasonally adjusted basis slumped 1.2% last month, the biggest monthly percentage decline in more than three years, the U.S. Census Bureau reports. On a 12-month basis, retail sales are 1% below the year-ago figures. As our chart below reminds, the trend looks ugly, and it’s virtually certain that there’s more of the same and worse on tap for the coming months.
The report gets uglier the closer you look. Save for spending at gasoline and health/personal care retailers, every major category of retailing fell last month vs. August. There’s still year-over-year growth in a few of categories, although the red ink is likely to spread on that part of the ledger.
If you can stand it, reviewing the unadjusted numbers for retail sales shows the state of consumer spending looking far worse. Indeed, unadjusted retail sales overall dropped 8.5% in September alone from the month before. One can only wonder October’s numbers will bring. As they say, where there’s one cockroach, there’s usually another.
Considering the U.S. economy’s high dependence on consumer spending (roughly 70% of GDP comes from personal consumption expenditures), today’s retail numbers speak loud and clear that the recession is here, and it probably has been for some weeks or month, and that the general economic downturn will deepen for the remainder of the year and quite possibly continue through early next year. Your editor was at a press conference with money managers in New York yesterday and one especially pessimistic chap talked of quarterly GDP falling by an annualized 5% at some point in this year’s second half. We’re not sure the pain will get that bad, but one can’t rule out much these days in light of all the negative surprises in recent weeks. The bright side of all this, if we can call it that, is that inflation for the moment is in hibernation. Again, no surprise there, at least not since last month, and for some the epiphany came a lot earlier. Yours truly, however, was a bit late to the party. But better late than never. We’ve been worrying about inflation for some time, and we’re still convinced that eventually this beast will return as a threat of some distinction, given all the liquidity that’s been pumped into the global economy. But the magnitude of the economic and financial ills recently convinced us to reconsider the threat in the short term and we said as much a month ago.
Today’s wholesale price report for September only lends more support to this view. Producer prices last month fell 0.4%, following a 0.9% drop in August, the Labor Department advises. Core PPI is still bubbling, posting a 0.4% rise in September, although we expect that too will moderate if not turn negative in the months to come.
A whiff of disinflation that could turn into a mild if temporary deflation is in the air. So it goes with all the economic and financial unwinding these days.
Unfortunately, the bad news for Main Street economics has only just begun. It’s unclear where exactly we’re headed and how much damage the economy will suffer. It’s still far too early to venture a guess other than to expect a hefty storm. No, it’s not the end of the world, but the Great Moderation, like so many other rosy assumptions that took root over the past generation, is set for a major revaluation. Recessions of some magnitude, in sum, only appeared to be a thing of the past.
Originally published at The Capital Spectator on Oct 15, 2008 and reproduced here with the author’s permission.