The US consumer is back, defying the odds and me. Last night we had October retail sales and results were good. From Calculated Risk:
On a monthly basis, retail sales were up 0.5% from September to October (seasonally adjusted, after revisions), and sales were up 7.9% from October 2010. From the Census Bureau report:
The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $397.7 billion, an increase of 0.5 percent (±0.5%) from the previous month and 7.2 percent (±0.7%) above October 2010. Total sales for the August through October 2011 period were up 7.6 percent (±0.5%) from the same period a year ago. The August to September 2011 percent change was unrevised from +1.1 percent (±0.3%).Retail sales excluding autos increased 0.6% in October. Sales for September were unrevised with a 1.1% increase.
This follows the less dire reading in consumer confidence late last week:
So, is this sustainable? In one sense yes, in another no. First the good news. This demand appears to have caught producers off guard, or, they have been managing inventories rather well. The September wholesale inventory number last week was low and the inventory sales ratio is also subdued:
This suggests that the unexpectedly strong (relatively) demand, will have to be met with an upswing in production rather than existing stocks. In turn, we could see extra jobs created that will add to the Christmas hiring season that has already matched pervious years. Also from Calculated Risk:
I can see this mini-cycle continuing to make a small dent in unemployment (as well as support Chinese exports through year end). It is, not, however, a resilient bounce. And here is why. Check out these personal finance charts from the US Department of Commerce:
Personal income growth is running at about 3%, below inflation. Note as well that personal savings have begun to fall. Outside of cars and student loans, consumer credit has fallen in the last three months so I conclude that the current round of consumption is funded largely from a savings rundown, following the big spike post GFC. We’ve been here before, of course, and such cycles can run for longer than anyone expects so we can’t discount that possibility.
But there are a range of headwinds. Yesterday I discussed the likely fallout from the developing European recession and the hit to the US’s $380 billion or so in exports to the Continent. But there are other problems ahead too. From Nomura via Alphaville, following are the scheduled fiscal drags for 2012/13:
Discretionary spending caps resulting from the debt ceiling agreement, troop drawdowns, and small expiring tax provisions at the end of 2011: $69bn, or 0.5 per cent of GDP.
Expiration of payroll tax holiday at the end of 2011: $112bn, or 0.73 per cent of GDP.
Expiration of extended unemployment benefits: $56bn, or 0.37 per cent of GDP.
Expiration of Bush tax cuts at the end of 2012: $238bn, or 1.5 per cent of GDP.
That’s a total drag of about 1.6 per cent of GDP for 2012 and 1.5 per cent for 2013.
Nobody has a clue about how much of this will either get negotiated away or get locked into some new debate about fiscal responsibility. But the projected cuts continue to stand as an imminent austerity package. Reuters carries an interesting debate between Paul Krugman and Larry Summers on the likely outcome. Summers thinks the Washington will get over itself. Krugman does not.
In balancing these internal and external risks, the San Francisco Fed has produced a new evaluation of the likelihood of the US succumbing to recession next year. And here it is:
The combination of these two recession coins, shown in the combined risks line of Figure 2, is quite disconcerting. It indicates that the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.
I’ve highlighted the key paragraph. As my above analysis shows, I doubt the US economy can withstand another shock of any magnitude.