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.
One thing not mentioned in Jim’s post is that consumer consumption as a percentage of GDP has been raising until the latest recession. It wasn’t that long ago that the number quoted would have been 60% vs. 70%. The real question is what is the real number that is sustainable? Doesn’t seem like 70% is a healthy, sustainable number. And for all the back and forth about our government and quotes about supply sides policies…I think our recent history shows that both supply side and entitlement program expansions have been the name of the game in the US and we bounce back and forth between the two. This is probably the worst possible combination from a national fiscal responsibility standpoint. We decide to give people more benefits and then we cut our tax rates to try to stimulate growth.
georic, we look down on our government because it continually lives down to our expectations. Part of our heritage is a mistrust of government. I am sure it is difficult to understand from abroad why Obama has to struggle to get his policies enacted…but then again we were baffled as to why the English turned on Churchill.
To the various comments on China…I just returned from there recently after living there for a year and I will tell you one of the biggest differences between there and here is that people have confidence that there country is on a path to a better future. They have a sense of pride in that and it gives them confidence. I don’t think the average American feels very confident about a brighter future right now.
annieandjack, I love your answer … the simple explanation is often the best … the economy has tanked because we’ve all bought everything we could possibly want! Look at the proliferation of self-storage units … we have so much crap we have to rent space outside our homes just to store it all.
doydum
you looking at the numbers without seeing the numbers. the difference in what is oaid between the rich and the poor will always be look like that. even if there is a flat tax. think about how many people making 24k a year it would take to add up to one person making a million. you can tax the poor but its like sqeezing water out a rock.
Squid,
Got any recommendations? I’d like to research that area. I didn’t realize there were floating rate bonds.
Our government’s “economically adjusted data” means “politcally manipulated data” and is adjusted to lead us to believe whatever they want us to. The inflation rate is another perfect example.
The retail sector did well in Dec despite the “data”.
Please choose your political candidates with more care.
People aren’t buying anything because they don’t need it and because the choices of things to buy are unappealing and, in the case of clothing, downright ugly.
So much uncertainty makes me look for something different that pays dividends and goes up with rising rates. What I chose is floating rate bonds. As much risk as junk but better if rates rise. Pays pretty good at these rates and will rise in value if rates do.
Sales are worse than reported. Competitors have gone bankrupt and therfore same store sales should show increases even if total consumer spending remains the same. The truth is found in receipt of state taxes. These should be up if consumer spending is up.
> In 2007 the top 10% wage earners paid 71.22% of the tax and the bottom 50% paid 2.89%!
Don’t you think these figures only show the extent of inequality in income distribution in this country? The top 10% of the country pays 71% of the taxes. Wow!…
A more meaningful comparison would be the tax rates of each group:
Top 1% 24.31
Top 5% 20.74
Top 10% 18.49
Top 25% 15.38
Top 50% 13.35
Bottom 50% 2.95
No too bad, isn’t it?… Now, don’t tell me the bottom 50% is taxed only 2.95%. These are your minimum wage people. Tax them more if you want; they are already below poverty.
Now, income tax is not the only kind of tax in this country. Sales taxes for example, are paid by everybody, which means mostly by the non-rich. If you add up all the tax burden, do you know what the tax rates are?
ticktock,
I have to roll out my favorite Warren Buffet quote now: “The 19th century belonged to England, the 20th century belonged to the US, and the 21st century belongs to China. Invest accordingly.”
doydum,
I don’t suppose you’ve noticed that our legislators keep promising to “tax the rich”, and STILL they don’t get taxed, even AFTER the rates go up? Welcome to the U.S., home of crony capitalism! For every tax increase, the wealthy get a nice tax shelter for their troubles, so they can protect their money, which they turn around and donate their portion to the politicians. Until we fix our campaign contribution system (how about trashing it and starting over?), nothing will change.
Don’t get me wrong. I’m all for capitalism. However, the cozy relationship which our legislators have with our big business sector is NOT capitalism. It’s a perversion of true capitalism.
Georic,
Give it a few decades, and I bet 97% of the Chinese people WILL have the American standard of living.
Over here in Europe, we are very well aware that the States are n°1 in the world and that little can be achieved without them.
Obama’s image is far far better than your former President’s, and I believe that his policy is a lot more sensible too.
It is bewildering to see how he has to fight to get his laws passed, and how you look down to your government.
By the way, I bet that more than 97% of the Chinese people would go for the American standard of living if they had a choice.
doydum,
What needs to happen is the government stop spending money it doesn’t have, not tax people more. And since you think like most people have been convinced that taxing the rich will fix all. Try on these numbers. In 2007 the top 10% wage earners paid 71.22% of the tax and the bottom 50% paid 2.89%! So basically the “rich” people are already paying most of the tax. I quote rich because the top 10% goes down to $113,000, which I can tell you in my part of the country isn’t really rich, because of the cost of living. I think at least 50% of the country are getting a great deal, and they know it and want the country to give them even more, and they are asking the government to do it. Everyone seems to think that the politicians don’t listen to the people. I don’t think that is true. I believe the majority of people say give me this or that, and don’t raise my taxes. Notice that give me is first, and raising taxes last. Anyone tries to take away anything and everyone is in there fighting to stop it as long as they get it. They all want the reductions to come from the other guy’s pot.
http://www.ntu.org/main/page.php?PageID=6
Thank you Jim for giving us your top down analysis of the trends where profits are likely to be made. An update for today on AONE, recommended by Jim in the recent past, shows that on news of the signing of a multiyear supply pact it went up from $20.03 to $22.60 (13%). Now back down to $20.60 but it has had about a 50% gain since its IPO at $13.50. It has two plants in Michigan near Detroit. Thanks again Jim.
> especially regarding pensions for public employees
You speak like the main problem in this country is the pensions for public employees. We arrived at this point after 30 years of supply-side economics and you still want to hit the demand-side?
Whatever reform that needs to be done (health care, finance, tax, social security, etc.) should depend on the moneys of the people who got rich during the last 30 years. These people have money. A lot of it and they don’t know what to do with it other than worrying that they might lose it. That’s why they buy treasuries paying negative interest. These people have the money and they do not invest. If they invest, they invest in China, India, etc. These people should be taxed to death and with that tax income, our debts should be paid and demand should be created so that this economy start running again.
“…if you want to invest in a socialist state where the government decides everything for the people, you may as well invest in China. At least they have some experience at it.”
As opposed to the US where the government is still learning how to control everything?
EdMcGon, I agree on your analysis of our possible future but I also wonder if our distance from China and lack of a real knowledge of how the country really works leads to “the grass is greener over there” situation.
Back to our own country, I see a real disconnect between the actions of the current administration/Congress and the rest of the country. In an earlier article Jim compared the actions of the Citi board to rearranging the chairs on the Titanic. I see a similar situation within our own government at all levels. Massive deficits yet zero action on any real spending cuts, especially regarding pensions for public employees. Wars that go nowhere combined with a clear disinterest in protecting our own country. Obama and team seem to be rudderless with no real ideas how to proceed except to mouth the same platitudes.
Actually, doydum has a good point. What exactly WILL happen in the next 12 months which could have a positive effect on the markets?
Health care passes? That just means all of us will begin paying more taxes on a health care system that won’t help anyone for years (and some people never). Overall effect: Negative.
Cap-and-tax passes? More taxes, to do…nothing. Overall effect: Negative.
Bank failures? Projected to hit a new high this year. Nothing positive yet…
Maybe the Fed won’t raise rates this year? Certainly possible. But if the economy starts to show life, so will inflation. Overall effect: Neutral.
Another stimulus bill in the U.S.? Considering all the jobs created by the last one (Clue: None), that’s just more money spent with nothing to show for it. More debt is the last thing we need. Overall effect: Negative.
Maybe small businesses will just start hiring millions of people for…? Looking at the situation above, I can’t think of a good reason for this to happen.
All things considered, the BEST we can hope for is that things don’t get worse. Meanwhile, if you want to invest in a socialist state where the government decides everything for the people, you may as well invest in China. At least they have some experience at it.
> 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.
Yeah… Maybe things started to get better during the last 14 days.
Jim,
If rising consumer spending is an indicator of economic health, what does this say about China, where the savings rates are decreasing and consumer spending is increasing? Granted, their spending is coming from levels far lower than the U.S. But I think it makes the Chinese market look even better in comparison.
I’m putting my money in China, and those American companies (like Apple) which are smart enough to try and tap into China’s growth.