Ouch, falling retail sales in December are a real disappointment to all those betting that they know how fast the economy will grow in 2010.
Time to put a little more humility back in all our projections and admit that we still don’t know what the real growth trend will be for 2010.
Stubbornly high jobless numbers with unemployment stuck at 10%, and figures showing that consumers are still cutting back on their use of credit can be shrugged off by strong growth believers. After all, these are trailing indicators. Employers don’t start hiring until they’re convinced that the economy is on a sustained upward trend, for example, so the economy often starts to grow strongly before unemployment begins to fall.
Same with consumer credit. Consumers keep on cutting back on their use of credit cards until their fear of losing a job falls and their paychecks start to rise. All that follows from rather than leads to economic growth.
But the retail sales numbers are different. If the economy is growing, it’s supposed to show up in these numbers.
Consumer spending is 70% of U.S. economic activity so if consumers aren’t spending, it’s hard to see how the economy could be growing. Before the numbers came out economists had been predicting that consumer spending would grow at a 2% annual rate in the fourth quarter of 2009, according to a Bloomberg survey conducted in January. That was up from a projection of a 1.8% increase in Bloomberg’s December survey.
In that same survey economists had forecast a 2.7% increase in U.S. GDP for 2010.
So an unexpected 0.3% decrease in December is enough to call into question assumptions about the strength of the U.S. economic recovery. Especially when it follows on a 1.8% jump in retail sales in November.
But please don’t head for the hills on two months of data—especially when the data comes from the end of the year holiday season. The government tries its best to adjust economic data to take out seasonal distortions but those adjustments don’t always work very well, especially around holidays that are heavy shopping periods. It’s always hard to get those end of the year adjustments right but it’s especially hard to get them right when the economy is shifting gears. Statisticians have only history to use in judging how to make seasonal adjustments but that history isn’t a particularly good guide to adjusting Christmas sales during the end of Great Recessions.
December’s unexpected disappointment should be enough to make investors temper any hasty bets on 2010 delivering more than modest economic growth of 2% or so. But one month’s data shouldn’t convince you that growth in 2010 will be more tepid than bullish investors now expect either.
More than anything else December’s number should remind all investors that we’re still waiting for enough data so that we know what the trend will be in 2010.
If the December data reminds us that sometimes the smartest thing to say is “I don’t know yet,” then it will have delivered a valuable message.