No wind in these sales
American consumers have shown a remarkable ability to defy economic gravity.
In September they again pulled off this financial conjuring trick. Underlying retail sales were brisk for a second consecutive month. It is impressive that American shoppers refuse to panic when confronted with high unemployment, stagnant wages and debt levels that would make European consumers swoon.
Yet this bravura performance will become ever harder to sustain into the winter.
To fully appreciate the strength of spending in the late summer, you need to strip out a series of volatile items.
The cash for clunkers program has sent sales whipsawing over recent months. Excluding autos, gasoline and building materials, sales climbed by 0.5 percent in September, building on a 0.7 percent gain in August. Beneath these aggregate figures are other indications that consumers are more willing to splurge on luxuries. Furniture sales were up 1.4 percent over the month, while clothing sales have now climbed in each of the past three months.
The deeply ingrained American habit of overspending is dying hard. But die it must.
A series of one-off boosts to income from government stimulus efforts are drawing to a close. Much of the money that seniors received from a one-off payout from Social Security may have already been spent. A tax credit for first time homebuyers is due to expire in less than two months. The cash for clunkers program, meanwhile, could end up weighing on consumer spending for some time as households digest the financial impact of buying a new car. All that is left of the consumer stimulus then will be the very modest reduction to withholding taxes — about $33 a month for most workers.
As the government efforts fade, there is no sign that largesse from employers is picking up. Weekly pay for production workers has now fallen for nine consecutive months — the longest contraction in the 44-year history of the statistical series. Even in the 1980s recession there was only a two month decline. Real disposable incomes have fallen in each of the last three months. Pay cuts — once a rarity — are becoming all too common.
In order to stump up the cash for recent purchases, Americans have been postponing the necessary task of repairing their personal finances. Families have levels of debt that remain stubbornly high and are still close to twice the peak of the 1980s boom. Yet consumers have returned to saving just 3 percent of disposable income. At such a snail’s pace it will take roughly 9 years to bring household debt down to a more reasonable level of around 100 percent of disposable income.
Only a surge in wage growth in the coming months would enable consumers to keep spending at this pace. This is a long-shot at best.
Given this underlying weakness, the recent firmness of consumer spending is looking ever more like an Indian rope trick. Shoppers are likely to come back to earth with a bump this winter.