Fears of a “Summer Pause” Prove Ephemeral

Many analysts, pundits and prognosticators were sounding alarms about “cautious consumers” and “threats to continued economic growth” after the Census Bureau reported on August 13 that both retail sales and the broader category of retail and food services sales in July were almost exactly what they had been in June. In other words, both categories were flat from month to month. Even more depressing, June was confirmed to have only increased 0.2 percent from May.

Those of us with more experience and greater knowledge of the volatility of these series cautioned against making snap judgments. We recommended waiting for the next release before becoming concerned about consumer spending, which makes up by far the largest share of GDP (68.5 percent of nominal GDP in 2013). The retail and food services part is about half of total personal consumption expenditures.

As is nearly always the case, this advice proved sound when we read the Census Bureau release of September 12. As the chart shows, not only did retail and food services sales set a new record of $444.7 billion in August, seasonally adjusted, but also both June and July were revised to be much larger than previously reported.

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July sales are now $ 441.8 billion on a seasonally adjusted basis, up 0.3 percent from June, rather than the originally reported $439.8 billion or 0.0 percent. June is now reported up 0.4 percent rather than 0.2 percent to a total of $440.3 billion rather than $439.6 billion, seasonally adjusted.

For the first eight months of 2014, total retail and food services sales were $3.46 trillion, up 3.7 percent from the same period in 2013. The biggest gain was at auto and other motor vehicle dealers, where sales were 8.0 percent ahead of the first eight months of 2013.

There are several reasons for this. One is that the average age of the 253 million vehicles we own (the “fleet”) is the highest ever, about 11.4 years. Another is that consumers have record levels of income and near-record levels of employment. A third is that banks, car dealers and credit unions are all competing to finance vehicle purchases at very good terms, including low rates, relaxed credit standards and maturities as long as eight years to keep monthly payments down. A fourth reason is that some measures of consumer confidence, while far from record levels, are at the highest point since the recession ended in June 2009.

Nonstore retailers (think catalog and internet stales) are up 6.5 percent from the first eight months of 2013 to $300.9 billion. That amount is 71.3 percent of the total for general merchandise stores ($421.6 billion) and nearly triple the $101.9 billion at department stores, where sales are off 2.5 percent from the first eight months of 2013.

We should see a record holiday shopping season in 2014. That will keep retailers smiling and contribute to several more quarters of real GDP growth above 3.0 percent at a seasonally adjusted annual rate, which is now the consensus for the first time in this expansion. That will be very good news if the economy follows that forecast. We’ve all been waiting impatiently for the US economy to break out of the subpar 2.1 percent a year growth path it’s been stuck in for the five years since the recession ended.

Dr. James F. Smith

Chief Economist

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