There was a good bit of excitement on Tuesday with the release of the retail sales report, which came in stronger than expectations. However, the bounce will be difficult to maintain as tapped out consumers face high unemployment and a slow recovery.
As we have discussed many times previously, the consumer is the lynchpin to the economy, comprising roughly 70% of economic growth.
The most valuable thing about the consumer is they are “financially stupid.” But what would expect from a generation whose personal motto is “YOLO – You Only Live Once.” However, this is why you “never count the consumer out,” as they always find a way to go further into debt.
Consumers are also why companies spend billions on social media, personal influencers, television, radio, and internet advertising. If there is an outlet where someone will watch, listen, or read, you will find ads on it. Why? Because psychologically, consumers are “trained” to “shop till they drop.”
As long as individuals have a paycheck; they will spend it. Give them a tax refund; they will spend it. Issue them a credit card; they will max it out. Give them a government stimulus check; they will spend it as well. Don’t believe me, then why is consumer debt at record levels?
If consumers were even partially responsible, financial guru’s like Dave Ramsey wouldn’t have a job selling products to get people out of debt.
However, consumers spending themselves further into debt is what keeps stock markets going higher and the economy going. Note, that I said “going,” and not “growing,” Take a look at the chart below:
In 1980, household credit market debt stood at $1.3 Trillion. To move consumption from 61% to 65% of GDP by 2000, it required an increase of $5.5 Trillion in debt. Since 2000, consumption as a percent of the economy has risen by just 3% over the last 20 years. To support that increase in consumption, it required an increase in personal debt of more than $11 trillion.
You should not dismiss the importance of that statement. It has required twice as much debt to increase consumption by 3% of the economy since 2000 than it did to increase it by 4% from 1980-2000. The problem is quite clear. With interest rates already at historic lows, consumers heavily leveraged and economic growth running at sub-par rates; there is not much capability to increase consumption that would replicate the economic growth rates of the past.
The Mirage of Wealth
The mirage of consumer wealth has been a function of surging debt levels. “Wealth” is not borrowed but “saved.” Such is a lesson too few individuals have learned.
This record level of household debt is also why the Federal Reserve’s (Fed’s) measure of “Saving Rates” is entirely wrong. It is also why economic growth will continue to weaken as debt continues to deter disposable incomes away from consumption into debt service.
“The ‘gap’ between the ‘standard of living’ and real disposable incomes is shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the ‘gap.’ However, following the ‘financial crisis,’ even the combined levels of income and debt no longer fill the gap. Currently, consumers cannot fill the record $2,654 annual deficit to maintain their lifestyle without more debt.”
The gap between the standard of living and incomes is another reflection of the wealth inequality which is pervasive in the economy.
Less Than Meets the Eye
While there was a massive jump in retail sales in May, a look below the headlines revealed a different picture. As noted by Mish Shedlock:
“Despite the surge, sales numbers are back to levels seen in late 2015 and early 2016. On a year-over-year basis, sales are 6.1% below May 2019. Total sales for the March 2020 through May 2020 period are down -10.5% from the same period a year ago.
Here are the five-month totals:
Motor Vehicles and Parts: -10.5%
Electronics and Appliances: -19.3%
Building Materials: +6.7%
Food and Beverage Stores: +13.1%
Health & Personal Care: -2.4%
Sporting Goods: -9.9%
Department Stores: -21.0%
Non-store Retailers: +16.6
Food and Drinking Places: -22.3%”
Notice the only positive sectors were those directly related to the partial reopening of the economy. Such was not unexpected, but it is also likely unsustainable. The stimulus checks are gone and more checks may be problematic to get through a deeply divided Congress. The additional $600 in unemployment benefits runs out next month, and there is only talk of a bill to extend them at reduced levels.
Unemployment is still a problem.
No Getting Back
Given that retail sales make up roughly 40% of personal consumption expenditures which in turn comprises roughly 70% of GDP, the impact to sustained economic growth is important to consider. As noted, unemployment is running at very-high levels, but without a substantial pickup in retail sales, re-employment may be disappointing.
What the headlines miss is the growth in the population. The chart below shows retails sales divided by the current 16-and-over population. (If you are alive, you consume.)
Retail sales per capita were previously on a 5% annualized growth trend beginning in 1992. However, after the financial crisis, the gap has yet to be filled and currently runs at just a 3% growth rate. Assuming we recover to full-employment next month, and retail sales return to its 3% growth trend, retail sales will take another step backward.
Such is the same outcome as we discussed last week with expectations for economic recovery. To wit:
“Before the “Financial Crisis,” the economy had a linear growth trend of real GDP of 3.2%. Following the 2008 recession, the growth rate dropped to the exponential growth trend of roughly 2.2%. Instead of reducing the debt problems, unproductive debt, and leverage increased.”