Retail Sales Recovery: V-Shaped but Sub-Par

Feb.12.10 | About: iShares Retail (RTL)

(Click charts to enlarge)

Retail sales grew at a 7.9% annualized pace in the six months ending in January, making for a pretty nice recovery.

However, as the second chart shows, although sales are increasing at an above-trend pace, they are still about 12-13% below the levels that would have prevailed in the absence of a deep recession. We see the same pattern in GDP, which is about 9-10% below its trend. The gaps in both of these cases are substantial, but they are narrowing. In previous deep recessions, this gap narrowed quickly, thanks to very strong growth. This time it's likely to narrow more slowly, thanks to the huge increase in the size of government, income redistribution programs and the threat of higher tax rates in the future.

If Obama were really the "fierce advocate of free markets" that he says he is, he would have done things very differently last year. Instead of counting on massive income redistribution and big increases in government spending, he would have trusted free markets to pull the economy out of recession and lowered marginal tax rates on income, capital and corporate profits to get things jump-started. The deficit would have been much lower and the economy much stronger. We're at a level of deficits now that are so high they are soaking up a major portion of the world's savings. If the government weren't borrowing so much, the world's savings would be used by the private sector in a much more efficient and productive manner.