Signs Of Life

Today’s news that retail sales ticked up 0.8% in November is cause for some optimism. This is the fifth month in a row that sales have risen and the data looks even better if we exclude the sales of cars which is a notoriously fickle number. By making that adjustment we find that sales rose 1.2% last month. More to the point, both the September and October figures were revised upward, meaning that for the last three months combined sales have grown at an annualized 7.8% rate.

A word of caution: retail sales does not map exactly to the personal consumption component of GDP, so we should not expect to see consumption at that level growing by 7%+, but there is some relationship, and thus today’s report supports the possibility of higher GDP growth in the latter part of 2010 than I originally forecast. It looks as if the economy will grow at the higher end of the 2.5% to 3.0% range and not languish between 2.0% and 2.5% as I first thought.

A second word of caution: we should also remember that the original stimulus, so successful in boosting the economy earlier this year, is now fading away. So rising consumption will be partially offset by the declining impact of that stimulus. Meanwhile the small kick up in growth coming from the payroll tax cut part of the recent tax deal will help provide a short term boost in 2011.

Putting all this together:

GDP looks to be set for a 3.0%+ gain next year, and then a slight fade in 2012. This rise in retail sales needs to be sustained for aggregate demand to return to levels that allow unemployment to decline significantly. We are moving in the right direction. Just not fast enough to make a lot of difference to the jobs market. Still, there are definite signs of life.