U.S. Retail Sales Resume Falling After January Uptick

After showing an uptick in January, retail sales dropped in both February and March from year-ago levels, dashing hopes that the recession in the US was bottoming out. Consumer spending accounts for 70% of US economic activity, so it is widely watched as a harbinger of things to come in the broader economy. With joblessness hitting record highs, consumer uncertainty rising, and admonitions that individuals as well as banks were over-leveraged, it's hard to imagine consumer spending roaring back any time soon.

U.S. Retail Sales Activity: March 2008 - March 2009

Source: WSJ

Retail sales fell 1.1% in March, according to the Commerce Department. Auto sales fell by 2.3% in March from the prior month; furniture sales fell 1.7% while electronics and appliances fell 5.9% in March from the previous month. Restaurants showed a decline of 1.4% as con

sumers cut back on eating out.

Also on Wednesday (4/15/09) the Labor Depratment reported that in March the consumer-price index (CPI) fell 0.4% below its year-earlier level, the first decline in over 50 years. Although the Fed continues to print money to refloat credit markets, inflation remains not only in check but the risk of deflation is in the air as consumers cut back on spending, increase savings, and manufacturers and retailers cut prices to entice them back into stores.

Consumer Price Index (CPI) Year-Over-Year Change 2000-2009

Source: WSJ

The Fed's Forecast on Unemployment, Inflation, and GDP

Fed data released Tuesday (2/24/09):

Delinquency rates on home mortgages in 4th quarter 2008: Almost 7% of outstanding mortgages

Unemployment rate in 4th quarter 2008: 7.6%, expected to rise to 8.8% this year

The Consumer Board's Consumer Confidence Index: 25, lowest level since data were first collected in 1967

February 2009 views on the job market:

"Jobs are hard to get": 48% of people surveyed, highest since Feruary 1992

"Expect jobs to decrease in the months ahead": 47%, highest percentage since December 1973

The Fed's Economic Forecast for the Next Few Years:

Unemployment, Inflation, GDP

Interest Rates & Consumer Price Infaltion - US & EU

Interest rates in the US remain 2 1/4 points lower than those in the EU, despite greater consumer price inflation in the US. The Federal Reserve in the US is charged with both keeping inflation under control and stimulating the economy, while the EU central bank's mandate is only to keep inflation in check.

Interest Rate and Consumer Price Inflation Trends - US & EU

Source: WSJ

The Inflation Story

The producer price index (PPI) is up 8.8% year over year, partly due to higher energy and higher commodity prices. But consumer prices are up only 4% on all items and 2.2%, excluding energy and food. This means that producers have been eating about 5% in gross margins to keep prices low. Discount retailers have been holding the line on prices as well, reluctant to give ground to any competitor. But if the PPI continues at this level or higher, eventually manufacturers and retailers will have to cave, accelerating the growth of inflation even more.

Producer Price Index is up 8.8% this year (8-19-08)

Core Inflation and Consumer Price Index through August 2008

At the same time, union membership has been falling steadily for the past two decades and outsourcing of white-collar information worker jobs gives workers less room to negotiate higher wages and salaries.

Partially offsetting the rise in prices, the dollar has been rising against foreign currencies, mostly due to their weakness, rather than the strength of the US economy. This makes imports cheaper and helps hold the line on inflation.

The Dollar Exchange Rate vs the Yen and Euro

All told, at the end of four years a 4% inflation rate, where the overall consumer price index is today, results in a $100,000 salary being worth only $80,000.

The Fed will have to turn its attention to this issue sooner rather than later if it wants to avoid a repeat of the stagflations of the late '70s and early '80s.

Inflation and Consumer Spending - July 2008

Disposable personal income (income after taxes), change from previous year:
Down to 1.2% after being up to 6% two months ago on the strength of Federal stimulus checks.

Personal consumption expenditures, change from previous year:
Down to 1.2% from a high of 6% in 2006

Prices - All items: up 4%
Prices, excluding energy and food: up 2.2%

See Graph, Wall Street Journal

Source: IndexMundi

An inflation rate of 4% will reduce the buying power of $100,000 to $80,000 in just five years.

U.S. Dollar, Euro and Yen Exchange Rate Trends

Since 2007, the U.S. dollar has fallen an average of 8% against the currencies of its major trading partners and the Euro and Yen have risen 12% and 10% respectively against the U.S. Dollar.

See graph, The Wall Street Journal

The Price of Gold, January - July 2008

Source: The Wall Street Journal

How the Price of Oil Affects the US Economy

Economic forecasting firm Global Insight estimates that each $10 per barrel increase in oil prices raises gasoline prices by roughly 19 cents a gallon, cuts growth in consumer spending by a third of a percentage point, reduces employment by 100,000 and adds one-half percentage point to consumer price inflation.

From The Wall Street Journal, January 2, 2008