The Commerce Department reported in its US Census Bureau’s January Retail Sales Report on Wednesday, February 14, that sales were down 0.3% in January. In addition, they revised down their December sales figures from the 0.4% increase initially reported to unchanged. This was followed on Wednesday, March 14, by another report indicating that sales had fallen 0.1% in February. After a strong fourth quarter of 2017, this continues with a stagnant sales trend from January to August 2017. Sales during those 8 months had the lowest standard deviation for that period since data collection began in 1992. For To highlight the problem, sales growth was lower than before the major market declines in 1997, 2000 and 2007 or the subsequent recessions of 2001 and 2008. In fact, only 2008, when sales were negative, had a lower sales growth from January to August. The interim reports may have sparked a ray of hope, but now that the good news for December has been brushed off and with January and February adding to the negative trend, these sales reports should pause.
Some, like Scott Anderson, chief economist at Bank of the West in San Francisco, have attributed the weakness to bad weather in January, which put construction projects on hold and kept consumers away from car dealerships. The weather may not have cooperated again in February, but I suggest there is an alternate explanation: the peak consumer shortage that I have written about previously.
In fact, the slowdown in demand for construction projects and automobiles serves as confirmation of the deficit, as this is precisely what one would expect from a reduction in the peak consumer population. Demographically, the biggest spenders are people between the ages of 46 and 50 whose children have moved and no longer have to shell out money for college. These are people who suddenly find themselves with a lot more disposable income and use it to buy expensive items like cars, new homes, or home renovations. Therefore, a reduction in that population would directly affect those industries.
Unfortunately, the impact of this trend is being swept under the rug as wage increases and inflationary fears take center stage. The focus is now on reports from the Department of Labor’s Bureau of Labor Statistics, in which January hourly earnings increased 2.9% on an annual basis compared to a 2.7% increase in December. . That was the biggest increase since June 2009. Hourly earnings moderated in February but still gained 2.6%, above the Fed’s 2.0% inflation target. Regarding inflation, The Bureau of Labor Statistics also reported that its Consumer Price Index increased 0.5% in January, compared with 0.2% in December, although the CPI moderated in February again to a growth of 0.2 %. The only reason the year-on-year rise in the January and February CPI held at 2.1% and 2.2%, respectively, is that some of last year’s big price gains were removed from the tabulation.
This is not the time to ignore sales figures. Once the deficit in peak consumers takes hold in earnest later this year, sales will be forced into a downward trend. Given that the deficit is not temporary but will persist and even worsen in the coming years, the drop in sales will be precipitous. In contrast, current inflationary pressures ARE temporary. Over time, we will see lower demand for products, more layoffs, lower wage increases and, as a result, lower inflation.
Given those prospects, we should see measures aimed at stemming a major economic recession. Sadly, we’ve been feeding off the easy money channel for far too long, and understandably, the Federal Reserve is itching to take off its punch bowl. Instead, what we will see are continued Fed rate hikes like the one we saw on March 21, which will raise borrowing costs for both corporate and government debt. The former will put pressure on corporate profits even as its top line drops. The second will increase the federal government’s debt payments on our growing national debt, giving it less room for maneuver to help during the looming economic storm.