Retail Sales

We don’t need to dwell too much on today’sretail sales report: they jumped 2.7% in August. Yes, they are still 5.7% below where they were a year ago, but the growth is both solid and good to see.

Or is it?

Well … over half the growth came from auto sales where the ‘cash for clunkers program’ drove a healthy 10.6% increase. This program is now defunct and already there are reports of sharp declines in sales subsequently. Plus the end of summer driving and price increases pushed gasoline sales up: they account for another part of the overall increase, and they too are likely to fade as we move into fall.

With those negative comments out of the way, the rest of the report suggests that there is some life stirring in sales. Hopefully this will translate into a steady rise in consumption and thence into an increase in employment. Sales excluding cars rose 1.1% with the gain being fairly widespread across a variety of categories: clothing, books, electronics, and food all started to show signs of life. These are the basic categories of consumption that we need to have recover if we have any chance of sustaining what now appears to be a very slight expansion.

Ironically this spurt in sales has had a negative effect on our trade balance: imports jumped up in July, the latest month for which we have data. The trade gap widened by 16.3% to $32 billion, which is the sharpest monthly increase for ten years. A good percentage of this jump came from auto imports which reflects both the ‘cash for clunkers’ program and the fact that American auto makers have lost significant market share. Since a trade deficit acts to reduce GDP – exports add to it, imports deduct from it – this sudden spike in the trade gap could endanger the recovery. Or at least it will make it slower.

One last piece of news: business inventories continue to shrink. This is generally a good sign for growth because it implies that producers will be forced to increase production in order to re-stock. This is the phenomenon we have been talking about for a while now and is the reason that we hear people like Bernanke and Obama call the recession ended.

Unfortunately an inventory re-stocking provides only a one time kick to growth: it normally gives enough of a jolt that the employers re-hire and consequently consumption grows. Given the massive overhang of unemployment and the cost consciousness of business, the odds of this ‘knock-on’ effect being very strong are low. It will be there, but it could be insufficient to offset the ebbing of the stimulus effect next year.

So today’s insight into retail sales was a welcome sign that we may still be able to keep growth going in 2010. The risk of a double dip still is out there, but after today’s report we can downgrade its odds of occurring.

Good news at last.