The Big Economic Mystery of 2015
If the economy is healthy, why are retail sales so poor?
Retail sales have been flat or negative for four out of the past five months. Even though households are saving an average of $50 a month on gasoline compared to a year ago, that savings has not inspired consumers to increase their spending.1
Commerce Department data released last week showed no retail sales growth in April; even core retail sales (which exclude car and gasoline purchases) rose only 0.2%. Retail purchases fell 0.2% in Q1, representing the first quarterly dip since 2012. Through April, they were up just 0.9% annually.2,3
What is holding the consumer back? If economists could pinpoint this on a single factor, there would be no mystery here. Significant clues have emerged, however.
Are people just saving more? Apparently they are. The personal savings rate declined 0.4% in March to 5.3%, yet it was at 5.3% or greater throughout the first quarter. In the previous three quarters, it never reached that percentage.4
Studies from the Federal Reserve and Visa also affirm a trend toward thriftiness. According to Fed research, Q1 saw the biggest decrease in consumer credit card use in any quarter in the past four years. Half the consumers contacted in a recent Visa poll indicated they would keep the money they saved thanks to cheaper gas prices; just 25% said they would spend it.2
Is cheap gasoline a factor? Certainly, because as gas prices drop fewer dollars are spent on fuel and automotive costs. That makes the headline retail sales number weaker. The weakness was already present, though: minus gasoline purchases, retail sales are up 3.6% in the past 12 months. That compares to 5.7% average annualized growth since 1990.2
How about the blizzards & port strikes that happened this winter? Analysts have frequently cited those two developments – but headline retail sales rose 1.1% in March even with their presence, and were flat for April as weather and labor conditions improved.2
Are households devoting more money to paying off good debts? Quite possibly, and this may also have influenced the retail sales retreat. As MarketWatch notes, student loan debt is now the fastest-growing debt in America. Households have also spent more on healthcare in recent years, implying greater out-of-pocket medical costs. (Healthcare spending has not flagged like discretionary spending, which is a big reason why headline consumer spending looks somewhat better than headline retail sales.) In the Visa poll mentioned above, 25% of the respondents said they would use their savings at the pump to address existing debts.2
What types of stores are suffering the most from the decline? Retail purchases at electronics stores retreated for a seventh consecutive month in April. Spending at department stores fell in April by 2.2%, the largest monthly amount in more than a year; furniture and auto sales also declined. The silver lining: sales rose 0.8% in April at online businesses, 0.7% at restaurants and 0.3% at home improvement stores.2,3
How long might this continue? Some analysts are optimistic that this slump will end this quarter. They point to decent year-over-year wage growth (2.2%), the April rebound in hiring, and warmer weather as positives. Other analysts feel that the economy is less healthy than it appears; they sense that the Fed will refrain from raising interest rates until 2016 in light of subpar retail sales and other factors.3
One thing is for certain: Wall Street will review the May and June retail sales reports with great interest. If discretionary consumer spending continues to lag, it will signal a loss of momentum in the growth of the economy.
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1 – blogs.wsj.com/moneybeat/2015/05/13/markets-react-to-weak-retail-sales-report/ [5/13/15]
2 – marketwatch.com/story/retail-sales-flat-in-april-as-gas-savings-continue-to-be-pocketed-2015-05-13 [5/13/15]
3 – bloomberg.com/news/articles/2015-05-13/retail-sales-little-changed-as-americans-reluctant-to-splurge [5/13/15]
4 – tradingeconomics.com/united-states/personal-savings [5/14/15]