Do tumbling retail sales mean a recession is imminent?
Government figures on September retail sales came out Wednesday, and you could hear reporters and experts wincing across the country.
Basically, retail sales across the country fell by 0.3 percent last month. Not a huge event, in and of itself. But it was also the first time since February that metric had fallen. In the midst of other signs of a slowdown, it added to the general sense of doom and gloom about the economy. But how worried should we be?
First, let's break out the numbers a bit. Two big factors in the decline were falling sales of gasoline and vehicles — a 0.7 percent and 0.9 percent drop, respectively, which contrasted sharply with a 1.9 percent rise in vehicle sales for August. These are two numbers whose implications can be contradictory: For instance, both sale declines were driven by falls in prices as opposed to falls in numbers of units sold. And lower prices are generally a good sign for consumers, as it means they have more money to spend elsewhere.
More importantly, and along with categories like food services, building materials and furniture, gasoline and automobiles are viewed by many economists as too volatile to be reliable as indicators of the economy's health. Once you remove those categories, you get so-called "core" retail sales, which are still two-thirds of the total. Those core retail sales grew at a measly 0.07 percent in September, down from 0.2 percent in August.
Again, not the biggest decline in the world. But what stands out is that, from May to July, core retail sales averaged 3 percent higher than in the February to April period. So they were growing quite fast earlier this year, and then suddenly ground to an almost-dead halt in the last two months. "It is possible the latest numbers will be revised up. Core spending over the past three months is still rising rapidly even if the August and September numbers were relatively weak," Matthew Klein wrote at Barron's. "That said, the latest figures represent a clear loss of momentum for the U.S. consumer after a strong run that had been just enough to offset a sustained period of stagnation between July 2018 and February 2019."
Finally, if we zoom out past the last few months or years to the last decade or two, September's plunge essentially disappears into the noise. We've had many, many drops in the growth rate of this magnitude — including into negative territory — without a recession suddenly hitting. In other words, September's numbers certainly aren't good news. But they're not necessarily bad news either. We just don't know.
That uncertainty is really the problem. Without a strong indication from retail sales in a positive or negative direction, the result gets interpreted in light of other signals we're getting from the economy. And those other signals are also in this weird liminal space of "gloomy and stagnant without quite indicating impending doom."
Services, which make up about four-fifths of the U.S. economy, are slowing down, according to the latest numbers from earlier this month. The Institute for Supply Management's index for the non-manufacturing portion of the economy (i.e. services) dropped from 56.4 in August to 52.6 percent in September. Anything below 50 in the index indicates overall contraction, so we're getting uncomfortably close to the tipping point. "Four of the 18 industries in the service sector are now in contraction, including real estate, wholesale trade and educational services," CNN reported. "That's up from just one industry, wholesale trade, which contracted as of August."
Meanwhile, the Institute's index for the manufacturing sector (roughly the other fifth of the economy) fell below 50 in August and remained below it — at 47.8 — in September. That's the lowest it's been since the depths of the Great Recession.
Finally, the other thing that's leaving observers nervous is the ongoing softness in investment.
You can think of retail sales as a measure of consumption by everyday buyers in the economy — one of the two big sources of demand in the economy, with investment being the other one. The indexes of services and manufacturing, meanwhile, measure the downstream effects of that demand as it moves through the economy. Investment has been sclerotic for a while, but the strong numbers on the consumption side made up for it. Now consumption might be slowing too. And we're seeing services and manufacturing slow down as well.
All of it paints a nerve-wracking picture. But are there any signs of hope on the horizon?
Possibly. The biggest is the Federal Reserve's recent course correction from hiking interest rates to cutting them again. The central bank is still cautiously playing this by ear, so there's no telling how aggressive they'll get. But looser monetary policy will free up credit to both companies and consumers, which should boost demand from both investment and retail.
An end to President Trump's trade war would also help, but there's no sign of that happening any time soon. And frankly, as much as reports on the economic slowdown focus on the effects of Trump's tariffs, the drag from the Fed's previous rate hikes is probably the bigger culprit. As much as people may hate to admit it, by blaming the Fed for the slowdown, the president is rather like the proverbial blind squirrel who found an acorn.
Of course, another big round of fiscal stimulus would also do a world of good. But that's not going to happen barring a Democratic takeover of Congress and the White House — so over a year from now, at the earliest.
In the meantime, the next batch of retail numbers come out in mid-November. Whether they continue or break with September's drop will give us a better idea of just how worried we should be.
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