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The engine of growth shifts into reverse
Wednesday, October 15, 2008
The Census Bureau just released the September retail sales data and the news was even worse than expected, all but assuring negative GDP growth during the third quarter.
Last month's plunge of 1.2 percent, along with downward revisions for both July and August, mark the first time since government record-keeping began in 1992 that retail sales have fallen during three consecutive months. This should remove whatever doubt remained regarding whether or not the U.S. is currently in a recession.
Note that these figures are not adjusted for inflation and would be much, much lower in real (inflation-adjusted) terms.
The declines were broad-based with sales rising in only two categories - a 0.4 percent gain for health and personal care products and a 0.1 percent increase at gasoline stations.
The fallout from the bursting of the housing bubble is clear to see at furniture and home furnishings stores where sales plunged 2.3 percent last month and are now down 10.7 percent on a year-over-year basis.
It's hard to see how these sales will rebound anytime in the next year or so.
After the energy shock over the summer and the slowing economy, the automobile sector is now in complete disarray with sales falling 3.8 percent last month and down a whopping 18.5 percent from a year ago.
The economic model of a zero-savings rate populace (i.e., where after-tax income less consumption is at or near zero) combined with consumer spending that accounts for 70 percent or more of economic growth was, without a doubt, a very poor one.
1 comments:
The last time you posted on the fact that consumer spending accounts for 70+ per cent of GDP, a reader left a comment that the reduction in consumption can be cured by an INCREASE in production by suppliers.
This person cited various economic theories such as 'Say's Law' ("supply creates its own demand") to argue that falling consumption would not be a concern for America.
I replied that, as a small business owner, I can assure anyone that I cannot increase demand for my products by simply producing more of them when demand slows. In fact, that is the quickest route to bankruptcy I can think of.
I was, frankly, stunned that anyone from the real world would buy into a line of thinking like that. Only someone with a PhD in economics and a pay check from the government could dream up that garbage and then actually believe it.
So, now, I wonder if that person still believes that the current drop in retail sales and the recession can easily be solved by just telling America's companies, en masse, to ramp UP production? And, even if he and his ilk still believe that's true, does anyone think corporate CEOs will do so?
The housing bubble burst is a FAR bigger problem than the stock bubble bursting because housing has such a big impact on consumption, directly and indirectly. The multiplier effect for housing is many times that of the stock market. And, it works in both directions: up AND down!
With consumption being over 70% of GDP, you will necessarily see a large drop in GDP as you slow consumption. This will lead to a further slowing of consumption due to unemployment. It is a vicious cycle. That's part of the reason so many people are nervous right now.
It seems highly unlikely, but I'd sure like to see the general public start to question the garbage that passes for thinking in the halls of academia and the ivory towers of government and people who claim to be 'experts' on TV.
The Emperor is naked. We need to accept that fact and deal with it.
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