The two most interesting words coming from the media about the drop in retail sales were, “unexpected” and “unexpected.” Today’s Census Bureau report said that retail sales were down 0.5% in June, and even ex-autos, was down 0.4%. Why this should be “unexpected” reveals more about contemporary economics than anything else. After all, economists are numbers driven, and a look at the retail sales chart (below) should perhaps have tipped them off. As you can see, the yearly trend line has been sliding downward for the past year. To expect rising retail sales in view of the negative data that has otherwise been reported (especially here) defies common sense.
Why aren’t consumers spending? There are several good reasons for that. One is that they don’t have the money that economists thought they had. As I pointed out several days ago, the rise in credit card debt is not positive sign, but rather an indication that consumers are financially stressed and are running up debt on their cards to get by.
Then there is the fact that, overall, consumers have been shedding as much personal debt as they could post-2008. This indicates that consumers are not confident about the future. This trend is not likely to reverse itself until wages and earnings rise, which they really haven’t. Wage growth has been relatively flat.
There is also the housing issue. While there have been calls that say the housing market has bottomed, this hasn’t exactly created consumer enthusiasm in those almost one-quarter of all homeowners whose homes are underwater (figuratively). This continued gloom in the housing market affects consumers’ attitudes about spending.
Then there is the personal savings rate which is heading south again. As of June, it was at 3.9% (up slightly) but the overall trend has been declining. This tells us that people are putting off savings in order to fund the necessities of life. Were the economy showing strong growth, a decline in the savings rate would indicate consumer confidence, but the surveys and polls on consumer sentiment show consumers’ concern about the future.
These concerns about consumer spending are important, but the emphasis is misplaced. The emphasis comes from Keynesians who believe spending, any spending, government or private, is the cure-all for the economy. This turns economic law on its head. To begin with, it hasn’t worked yet to revive the economy, and never has worked. You have to start economic recovery by liquidating the bad investments resulting from the bubble, and then saving new capital to replace the capital that was destroyed. When savings rise after a proper liquidation, then production begins, wages rise, and ultimately consumers spend.
What we are seeing now is the disappearing mirage of growth from several rounds of quantitative easing and ZIRP. It wasn’t real and now the economy is sliding backwards. This trend will continue until, once again, the Fed begins a new round of quantitative easing. This time the mirage of growth will have a shorter life, and when it wears off too, the economy will continue to stagnate.
It isn’t a surprise, it is entirely expected.