Retail Sales and Jobs: Both Weak

For those in search of evidence that the recovery will be robust today is a distinct downer. The only good piece of news released today is that the inventory to sales ratio is still declining which tells us that businesses are getting closer to getting their houses in order, albeit at much lower levels of activity. We have been calling the recovery ‘inventory led’ so we should expect that ratio to snap back in line with historic standards.

For the rest: today’s news was decidedly glum.

First retail sales.

Were it not for the government’s ‘cash for clunkers’ program which generated a decently strong level of car sales, today’s report would have been really bad. The all-in sales levels fell by 0.1% in July, whereas most ‘experts’ had expected growth of around 0.8%, which would have been the same increase as we saw in June. Take out car sales and the fall is even more dramatic at 0.6%. So after three months of growth and plenty of optimism that consumers were finally getting back to the stores, we have to be struck by the sudden stop. Clearly an atmosphere of hesitancy still pervades the economy and we have every long way to go before confidence is restored sufficiently so we can predict sustainable growth.

Yes the numbers contain some quirky details: gasoline prices fell quite a bit – enough to pull gas sales down by 2.1%. In fact gasoline alone accounts for much of the overall weakness. And it is sometimes hard to explain why something like lower prices, which are obviously beneficial to consumers, aggregate into something bad at the national level. Nonetheless sales are sales: we need the cash to flow through the economy and not sit in savings accounts if we are to get job growth back on track.

Speaking of which: today’s weekly first time claims for unemployment assistance figures were also disappointing. All of the evidence last week was that we have hit a different point in the employment cycle: fewer jobs are being cut so the pace of loss is easing, but there is still no sign of re-hiring. Today’s report that claims actually rose slightly, by 4,000 to a total of 558,000. Most people had been forecasting a steady decline, so the jobs report is very disappointing.

To put the job market in perspective: this rate of new claims is 27% higher than this time last year. Even worse is the number of ongoing claims, a measure of longer term unemployment, which dropped by 116,000 last week but now has soared a full 83% over last years level. There is no evidence that the drop in ongoing claims relates to a burst of hiring: on the contrary the more likely cause is that a growing number of unemployed workers are exhausting their benefits and simply dropping off the statistical database.

This cannot be good news for the economy.

Putting all this together, and taking into account the productivity news from earlier this week, we can begin to see the shape of whatever recovery is now occurring: it is truly jobless.

The critical point to keep in mind is that the economy has huge slack in it. Businesses have shed not only vast numbers of workers, but also hours worked by the people still employed. So any immediate pick up on sales activity can be met easily by extending the work week back to more normal lengths rather than through re-hiring. This is why the unemployment rate is likely to stay stuck in the 9% to 10% range for a while: if it comes down at all the decline is more probably driven by disaffected workers leaving the workforce than through job generation. So we are no going to see a rapid turn about in employment. On the contrary this has all the makings of stagnation as businesses protect profits rather than expand.

If this outlook for jobs is correct, and the odds are well over 50-50 that it is, then the uncertainty that is preventing a recovery in consumption will continue to dampen growth even more: household wealth has taken such a beating, debt levels are adding to the burden – the number of homes where the mortgage is more than the sales value of the home is at record levels – and job security is sketchy to say the least.

With this as background I repeat my warning that we may well slip back into recession next year unless there is more stimulus.

Think of it this way: if the forecast growth for the rest of the year of between 1% and 2% is correct, and if our estimates of the impact of the stimulus package are accurate -which despite Republican naysaying we have no reason to doubt – then that entire growth will be accounted for by the government package. All of it. Put alternatively: without stimulus we would still be in steady decline right through this year.

As the stimulus works its way through next year we need to see a lot more evidence that the private sector is back on its feet. Only then can we argue credibly that no more stimulus is needed.

On the basis of today’s news we are a very long way from that point. Those ‘training wheels’ can’t come off for a very long time!