INDICATOR: July Retail Sales
KEY DATA: Total Sales: 0.0%; Excluding Vehicles: +0.1%
IN A NUTSHELL: "The consumer has taken a holiday from shopping."
WHAT IT MEANS: Remember the phrase "shop 'till you drop"? Well, forget about it. Consumers are not shopping very much at all. I often argue that we shouldn't expect a major return to the malls (or Internet) until incomes started growing. Since incomes are not growing, it is not a major surprise that retail sales would be sluggish. But this is getting ridiculous. For the second consecutive month, households skipped the trip to the store. July retail sales were flat after rising modestly in June. We knew that vehicle purchases eased from the robust June sales pace but that is hardly a concern as they are still at a very strong level. The real worry is weakness in electronics and appliances, which has been faltering since they surged in the first quarter. A similar trend was also seen in furniture sales. It looks like a new vehicle is the only big-ticket item people are buying. Sales at department stores were down sharply, indicating a trip to the mall was not something a whole lot of households did. Not every retailer hit the skids in July. Supermarkets, restaurants, sporting goods, health care, building materials and clothing stores all posted gains, though they were nothing special.
MARKETS AND FED POLICY IMPLICATIONS: People just don't seem to be into shopping right now. Undoubtedly, income is an issue. But six years of economic uncertainty may be changing spending patterns, at least for a while. Consumers are finding they can live without a lot of the stuff they used to buy automatically. Our consumption society bought an awful lot of things that we probably didn't need but thought it might be nice to own. Just as the Great Depression scarred a generation of consumers, the Great Recession may be modifying the need for things. How long that "I don't need that" attitude may last is unclear. We will not really know until incomes start rising strongly for an extended period. But there is a good possibility that the savings rate during this expansion will be higher than during the housing bubble-driven spending boom in the 2000s. Savings as a percent of disposable income was on a clear downward trend from 1975 to the beginning of the recession in early 2008. Fear and financial necessity drove the rate up. It is down somewhat this year but it is still above the average posted from 2000 to 2007. Regardless, right now people are just not parting with their hard-earned funds and that is a concern. For the Fed, though, softer retail sales mean more moderate economic growth so there is less need to raise rates. That should make investors happy, even as it raises questions about earnings.