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Thursday, September 24, 2009


have expectations for the economy got too high?

while a positive GDP print for the third quarter seems assured, numerous commentators have explored the nature of the economic rebound. one of the best among them is edward harrison of credit writedowns, who has pegged the uptick as an inventory correction cycle.

I have written about the present business cycle as the mother of all inventory corrections. Erroneously, I suggested we were going to see a re-stocking of inventories. That’s overstating the case. What I meant to say was that inventories were being purged so much in the first half of the year that it would lead to GDP growth even in the absence of re-stocking. This is something I stated correctly in May.

Thinking about production as opposed to sales again, you have to look at inventories. The NBER is not fooled by inventory builds because they look at both industrial production and retail sales. But, since GDP is a pure production statistic, inventory builds distort the picture. For example, say your economy produces $980 worth of stuff one quarter that gets sold. But it also sells a lot of stuff, $20 worth, out of inventory. If next quarter, you need to sell just as much stuff ($1000), guess what, GDP growth goes up automatically (Remember, we are not talking about GDP, but GDP growth). The inventory purge means you are producing less to meet demand than you would otherwise need to. So, when comparing one quarter to the next, unless you purge just as much stuff or unless demand goes down, you need to produce more. Therefore, you get an automatic uptick in GDP growth.

This is what is happening now. The positive impact that inventories is having on GDP growth has to do with the fact that GDP growth is a first derivative statistic where even subtracting a less negative number is positive.

inventory corrections often are an early feature in self-sustaining economic expansions. but in the final analysis, sustainable recovery will come only as a product of end demand pickup -- and that is where i want to focus. new deal democrat, one of the bulls of bonddad, has analyzed in multiple parts his expectations of a reversal in the employment trend. his latest installment integrates his previous analysis of real retail sales, industrial production and initial claims in a nascent model of unemployment, with real retail sales being the ultimate leader of the cycle turn. improving employment, as jobs are added to the economy, provide fuel for further retail sales gains.

this makes real retail sales perhaps the most important economic indicator to watch going forward. the month-ago report for august was really the first positive indication of retail sales growth since the start of the depression in late 2007. the september figure won't be release until mid-october.

does this uptick represent the start of sustainable consumer spending growth? this could be the all-important question.

the depression, as barry eichengreen and kevin o'rourke have made clearer to the world, must (much like its predecessors) be seen in its entirety as a global phenomena to be properly understood. so a look at retail sales trends in other countries might be instructive.


Canadian retailers unexpectedly posted lower sales in July, led by falling prices at gasoline stations, as consumers brought a two-month shopping spree to an end.

Sales dropped 0.6 percent from the prior month to C$34.2 billion ($32 billion), Statistics Canada said today in Ottawa. Economists expected a 0.7 percent increase in July, based on the median of 20 estimates compiled by Bloomberg. ...

This is a “horrible across-the-board report,” said Derek Holt, an economist at Scotia Capital in Toronto. “It may signal the release of pent-up demand from last fall is over with.”


French consumer spending fell in August when it had been expected to rise, as shoppers cut spending on clothes, shoes and cars, raising questions over the robustness of a nascent economic recovery.

Consumer spending, a key economic driver, fell 1.0 percent month-on-month in August, well below a consensus forecast for a 0.6 percent rise after a fall of 1.2 percent in July, national statistics office Insee said on Wednesday. ...

"In my opinion, it illustrates that difficult times are here for consumption," said Olivier Gasnier, an economist with Societe Generale.

"We are entering a period which is much more difficult for the labour market: prices are beginning to rise and the labour market is not on a good track."

new zealand:

New Zealand’s retail sales unexpectedly fell for a second month in July, adding to signs the economy faces a slow recovery from the worst recession in three decades. Sales dropped 0.5 percent from June when they declined a revised 0.1 percent, seasonally adjusted, Statistics New Zealand said in Wellington today. Core retail sales, which exclude car yards, fuel outlets and workshops, fell 0.5 percent.


U.K. retail sales unexpectedly stalled in August as shoppers bought less clothing, a sign consumers are cutting back on spending as unemployment rises. Sales were unchanged from July, when they climbed 0.2 percent, the Office for National Statistics said today in London. The median forecast was for a 0.1 percent increase, according to a Bloomberg News survey of 30 economists.


Japan’s retail sales fell for an 11th month in July, extending the longest losing streak since 2003, as poor weather and a worsening job market kept shoppers at home. Sales slid 2.5 percent from a year earlier, the Trade Ministry said today in Tokyo. The median estimate of 15 economists surveyed by Bloomberg was for a 3.5 percent drop. Consumers cut spending at the fastest pace in five months in July amid falling wages and a record-high jobless rate. The record 25 trillion yen ($266 billion) in stimulus spending that helped Japan’s economy expand for the first time in more than a year has failed to bolster sales at retailers. “Wages have been falling very steeply,” said Masayuki...


Retail sales in Germany rose for the first time in three months in July as lower prices boosted purchasing power and consumers grew more optimistic about the economic outlook. Sales, adjusted for inflation and seasonal swings, increased 0.7 percent from June, when they fell 1.3 percent, the Federal Statistics Office in Wiesbaden said today. The result was in line with the median estimate in a Bloomberg News survey of 26 economists. From a year earlier, sales decreased 1 percent.

one could also cite china's in-line retail sales, but like most i doubt there's much truth in chinese statistics.

the only unambiguously positive retail sales report in this cycle was the united states', augmented as it was by a huge rush to buy cars under the cash-for-clunkers program and a seasonal uptick in housing activity supported by expiring tax credits that has been powerful enough to overwhelm seasonal adjustments.

but the global picture here is one of disappointment -- retail sales are refusing thusfar to grow as hoped in spite of tremendous global stimulus, and given the relentless contraction of consumer credit that should perhaps not be surprising. western society -- and particularly america, britain and other current account deficit currency unions -- has spent thirty years calling forward future demand by leveraging the household, and with that trend reversed it's hard to expect a big retail sales recovery. this is also why inventory, though it has been cut significantly, is still as a function of sales very high -- and this is the most relevant measure to business profitability, as the modern business model prices for just-in-time delivery and takes losses more quickly on inventory than in times past. though the inventory cycle is pushing activity higher, businesses have the potential to be squeezed both by higher-than-normal inventories and profit margin compression as producer price increases remain difficult to pass on to the consumer. (updated PPI comparison here.)

retail sales measures over the coming weeks may be critical to divining how the inventory cycle plays out -- as a first stage to launching a broader consumer recovery, or as an uptick in a larger depressionary scenario that is simply taking time to play out.

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