Job Losses, Higher Prices and Weak Housing Hammer Retail Sales
Alex Carrick
U.S. Total Retail Sales Rise only 2.0% Year over Year
The latest statistics from the U.S. Census Bureau show a further deterioration in total retail sales in March 2008. Three-month smoothed sales increased only 0.1% from February 2008 and 2.9% from March of last year. The actual sales increase versus last year was only 2.0%. The year-over-year figures are the lowest since spring 2003, five years ago.
Remember that the retail sales figures are in current dollars. The latest all-items increase in the Consumer Price Index (CPI) was 4.0%. Therefore, “real” (inflation-adjusted) retail sales can only be declining.
Causes for Weakness:
(1) Deteriorating Employment Prospects
What are the causes of retail spending weakness? For starters, there are deteriorating employment prospects. The first quarter of this year saw total employment in the U.S. drop by 232,000 jobs. A healthy degree of consumer confidence begins with having a job. That is why consumer confidence has recently ebbed to a low point. In uncertain times, people spend with greater caution. They become more conservative in their purchases, particularly with respect to big-ticket items (e.g., durable goods such as cars).
In the last significant downturn in the U.S. economy, it took four years for total employment to return to its previous peak level. By the way, according to the latest labor force statistics, retail employment currently stands at almost exactly the same level as it was in March of last year, further confirming the softness on the consumer spending side.
(2) Chaos in Housing Markets
Another explanation can be found in housing markets. They have been in chaos for two years now. The subprime mortgage crisis that first arose last August began a process of erosion in financial markets that is still in play. Mortgage-default problems have rippled out into other debt-repayment areas such as credit cards. Mortgage foreclosures and an excess of housing inventory have caused house prices to drop and that affects how people view their own prosperity. This diminishing “wealth effect” is another factor in reduced retail spending.
Much of retail spending is on the home. Therefore, the dramatic drop in housing starts has cut severely into spending. Furthermore, new home sales go hand in hand with existing home sales. The latter are undertaken by individuals wanting to move up or to change their lifestyles (e.g., “empty nesters” trying condo living). The new owners of existing homes then fix them up to their own liking. Such renovation activity has been affected as well. As a consequence, housing-related retail sales have slipped dramatically. Actual furniture and home furnishing store sales are -6.3% year over year and building material and supply store sales are -3.1%.
(3) External Factors − Record Oil Prices and Low-valued Dollar
Then there are external factors. The international price of oil has just climbed to a record-high $114 US per barrel. The price of gasoline as a sub-component of the CPI has risen 32.7% year over year. Gasoline station sales are ahead 20.8% from a year ago. Higher transportation costs are cutting into motor vehicle sales, which are now down 3.7% on a year-over-year basis. Furthermore, higher fuel costs generally are having a wider impact on the economy than just on retail sales. For example, a number of (so far smaller) airlines have had to seek bankruptcy protection because they are being squeezed by higher costs, reduced travel and tighter safety measures. This is reminiscent of other times in the past when jet fuel prices skyrocketed.
After paying for gasoline and heating fuel, there is only so much money left in paycheques to cover other items. Furthermore, those other items have not gotten any cheaper either. The food and beverage sub-component of the CPI increased 4.5% in the latest set of measurements. The costs of medical care also rose 4.5%. Finally, the drop in value of the U.S. dollar has generally lifted the price of consumer goods that are imports.
These are Hard Times, but Relief is On the Way
These are hard times. All of these pressures help to explain why Wal-Mart’s latest financial report exceeded expectations. Consumers are on a hunt to find the lowest prices for their staples.
Help is on the way. Relief will come in at least three forms: (1) interest rates have been cut and this will ease both existing and future financing commitments; (2) the federal government’s tax rebate cheques will be sent out in May; and (3) housing starts appear to be stabilizing and even a period of little or slow gain will be much superior to the recent history of declines.
