Sales Edge Up; Inflation Flat
This morning’s news is a quiet confirmation that the economy is slowly perking up. But it is not a ringing endorsement of growth either. So we remain in a form of economic limbo waiting for stronger signals that the recovery is gathering pace.
The better news today is the March retail sales figure. Last week we heard a much heralded sequence of news form the big retailers all of whom reported good gains. Those numbers are always a bit misleading because they are not comprehensive, so we had to wait for today’s figures to see whether the big stores were an outlier or whether they captured an accurate picture of actual activity.
Apparently they were a fair indicator, even though they evidently they were stronger than sales as a whole.
The good news is that retail sales grew 1.6% in March, up from February’s 0.5%. The bad news is that sales of autos were a very substantial component of this total gain. If we back out autos the February number increases to 1.0% and the March number drops to 0.6%. So instead of a month to month increase we have a month to month decrease.
Wow. What to make of that?
Basically the message is unchanged. Activity is picking up, but very slowly. The recession is over, but it still doesn’t feel much like it. And risks abound.
Remember: one of the biggest features of this recovery will likely be a shift away from consumption towards investment and exports as drivers of growth. American consumers have been burned by the real estate bubble and will take time to rebalance their books. As they do that they will spend less and save more. All the signs support this view: consumer debt is dropping at a record pace as people shred credit cards and eliminate debt in order to free up cash flow. This is a healthy process but it will make the recovery much less vibrant. It is this adjustment that makes the current trends so difficult to get a good grip of. Anyone who makes bold claims about a strong recovery is underestimating the effects of the debt reduction process.
Another aspect of the slow recovery is the near total absence of inflation.
Once again the same mixed signals clutter the data.
The March CPI result is for a very low 0.1% increase. Negligible inflation in other words. This follows February’s 0.0%. But if we adjust for the items that tend to bound about – oil and so on – the figures are reversed. This ‘core’ CPI showed 0.0% in March down from 0.1% in February.
Inflation is just not an issue.
On the contrary we are perilously close to a deflationary trend.
Deflation would be a major problem: it makes debt burdens grow since future repayments are in deflated dollars. So an already debt heavy economy would be even more encumbered and households even more cash constrained than they are now. This is the trap that Japan fell into during the 1990’s from which it is still struggling to escape.
While I do not believe the US economy will drop into outright deflation, it is clearly undergoing a period of intense ‘disinflation’, which has a short term effect similar to that of deflation. I have advocated that the Federal Reserve Board stoke inflation a little in order to ensure we remain out of a deflationary zone. I think an annual inflation rate of around 2% would be very healthy. Not only would it keep us out of the hole japan fell into, but it would ease debt loads just enough to make real growth a more easily attained target.
The Fed does, indeed, target a ‘normal’ inflation rate of about 2%. Today’s numbers illustrate just how far away from that normality we are: the huge overhang of underutilized resources – most obviously that 9%+ unemployment rate – is pressing down on prices and making it practically impossible for businesses to raise prices. On the contrary, sluggish consumption is forcing a flurry of discounts and sales that push prices down. Hence the current absence of inflation.
Taking the sales and inflation figures together, we can characterize the economy as being in a slow motion and slightly positive trend. That’s good, but it could be so much better.
