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November Retail Sales Register a Decent Advance

Prof. Peter Morici - 12/15/2006

On Wednesday, the Commerce Department reported retail sales in November increased 1 percent from October, and retail sales, less automobiles and parts, were up 1.1 percent.

November sales gains should be viewed along side the 0.1 and 0.3 percent contractions in October spending on all retail items and those excluding automotive products.

Compared to a year ago, November retail sales were up 5.6 percent, and excluding automobiles and parts, retail sales increased 5.3 percent.

Overall, these are decent but modest gains. Retail sales are advancing at a bit less than 0.5 percent a month, and this is not enough to power robust economic growth.

Sales of upscale items remain strong. These are powered by recent stock market gains and strong employment and pay increases for professionals and managers well positioned to benefit from globalization, for example in investment banking, law, top levels of corporate management, and accounting.

Sales at many mid-scale retailers are registering only modest gains over last year. Household incomes are still rising but consumer caution reflects the impact of the flagging housing market and layoffs in manufacturing and new home construction. Middle class white collar and blue collar workers continue to spend but with a more cautious eye.

Gasoline, House and Stock Prices

In November, the average retail price of gasoline was down 1.8 cents per gallon percent, or less than 1 percent. Coupled with falling prices in September and October, this stability in gas prices helped move up sales of nonessential items such as building materials for home improvements and sporting goods, hobby and music store sales.

Although housing market has softened since the summer, house prices are still up about 55 percent over the last five years. While homeowners may not expect much appreciation over the next twelve months and values will fall in some cities and communities, homeowners still have a lot of untapped equity to finance additional spending. The reservoir of wealth created by the housing boom has not evaporated and is only partially spent.

Stock prices have risen about 12 percent since August, and this has more than compensated for falling home equities on household balance sheets. The outlook for stock prices remains good, as profits continue to grow, especially among firms with significant overseas operations.

Lower gas prices, the realization that housing prices are not collapsing, and a buoyant stock market should keep consumers spending in 2007, albeit growing at a more moderate pace than in recent years.

Retail sales should advance at a modest 5 percent pace in 2007.

Outlook for Growth

Home builders have lots of inventory to work off, buyer caution is slowing this process, and housing construction will not recover significantly until mid 2007.

Commercial construction and business investment have been more buoyant lately; however, better performance from these components of business investment will not be enough to offset the drag on economy from fewer housing starts.

The only real opportunity to spur growth will be through a lower trade deficit, which continues to drag down the economy. The dollar has weakened but mostly against the euro and the currencies of other industrialized currencies, where exchange rate movements have modest consequences for patterns of U.S. imports.

Against the important Chinese yuan, the dollar has not moved much and remains too high. The yuan sets the pattern for other Asian and developing country currencies, which are critical to reducing the trade deficit. Unless Secretary Henry Paulson finds a way to succeed in talks with China, in a way his predecessor John Snow could not, Americans can expect the trade to weigh down growth and a deteriorating job market.

Confident talk from the Federal Reserve that economy is on a solid footing more reflects the Fed’s preoccupation with inflation than the economic fundamentals.

Growth will be sub par, in the range of 2.5 percent or less, without significant measures to reduce the trade deficit or lower interest rates.

Slow growth results not from the fundamental physics of the economy but from conscious policy choices at Treasury and the Federal Reserve.