Pronouncements that the “Great Recession” is over require third quarter spending to continue into the final three months of the year. While it looks like Wall Street employees will have the cash to buy holiday gifts, the country is a lot bigger and today’s retail sales give some pause to the notion that the economy has positively turned positive. The key benchmark, the one that the Fed looks at because it best matches Consumption in GDP, is control retail sales – sales without spending for autos, gasoline and building supplies. Control sales were positive in September (+0.44%) but less so than August (+0.75%) (see chart). Lest anyone think that two straight months of gains equals a cycle change remember that in January and February the percent changes were even more positive but all that positive momentum ended with March.
The probability of continued spending drops a bit more when combining purchases at clothing stores, general merchandise stores, hobby book and music stores, and bars and restaurants – truly discretionary spending. As the accompanying chart illustrates that while these discretionary sales have grown in each of the past three straight months of gains the drop off from August to September was considerable. True, there is a lot of volatility in these numbers and sales could be skewed by early back-to-school buying that took sales volume out of September into August which was made to look worse by the September seasonal factors.
Nevertheless, incomes remain weak and employment is still falling, hardly the backdrop for a sustained pick-up in discretionary buying. The data do prove out that the “Great Recession” is over. For the optimists a “growth recession” has begun, for the realists fourth quarter GDP will be negative as the economy shifts into a mild downturn.