Today’s update on retail sales for January shows that the annual change in consumer spending has returned to pre-crisis levels in terms of 12-month rolling changes. In fact, the 4.7% increase in retail sales over its year-ago level as of last month is quite a bit better compared with the trend in early 2008. But like so many other measures of economic and financial activity, the return to levels that pre-date the financial crisis that swept through the markets and the global economy starting in September 2008 is only half the battle, and arguably the lesser part.
On a monthly basis, January’s 0.5% rise in retail sales (seasonally adjusted) is middling relative to recent history. Of course, any news of higher spending is welcome in the current climate, i.e., the ongoing weakness in the labor market. It could easily have been a lot worse.
Looking at the rolling 12-month change is more encouraging, as our chart below shows. But it’s not terribly surprising to find that the annual pace of retail sales have rebounded from the depths of the late 2008/early 2009 crisis. Recognizing that the risk of seizure in the world’s financial system has fallen dramatically, consumers are spending again in something closer to the normal trend. (Click chart to enlarge)
One reason is the natural bias in the business cycle for recovery after decline. The economy was either going to implode or it wasn’t. Since it’s been obvious for months that the worst fears of late 2008/early 2009 were excessive, a number of metrics have recovered in sympathy with this updated information. From industrial production to the stock market to consumer sentiment readings, there has been a clear and significant rebound. Even inflation expectations, as per the Treasury market’s expectation, have returned to pre-September 2008 levels.
The fact that retail sales have joined this bandwagon is no surprise. All the more so if we consider that monetary policy and fiscal stimulus have been juicing the natural forces of recovery.
But as we’ve been discussing for some time, there are two stages in the post-crisis world. The first stage is one of the snap-back period, when the end-of-the-world expectations are replaced by more temperate outlooks that reflect the world as it now appears. The immediate beneficiaries of this first phase are those measures of economic and financial activity that are relatively easy to repair. Dropping interest rates to zero and sending checks to consumers, businesses and other entities results in some obvious and fairly predictable responses. In other words, the easy and quick solutions have been applied, and with a degree of success.
The tougher challenges, however, remain, starting with the labor market, which has yet to show convincing signs of recovery. More generally, maintaining robust growth from here on out in everything from retail sales to industrial production promises to be a much bigger challenge than is typical in post-recession periods of recent decades.
Bottom line: the actute portion of the crisis is over but it’s been replaced by the post-crisis challenge, which is one of generating and maintaining growth. High levels of debt on the government and household balance sheets threaten to make the second stage far more precarious than the recent snap-back numbers suggest.
Alas, there are no easy solutions for what awaits. That doesn't mean that the future is doomed, but the tailwind that's been blowing over the past year is no longer a hurricane. It's been downgraded to a tropical storm and in the near future it's likely to downshift to a strong breeze. Evolution is constant in the business cycle, and the next phase isn't likely to be all that helpful.