Popular Economics Weekly

Consumers are spending for the holidays. Retail sales in particular have rebounded to almost pre-recession levels. Since consumers make up around 70 percent of all economic activity, does that mean we can look for a fuller recovery in 2012, including more jobs?

So much depends on what has hurt consumers, of course. We can start with the reduction in household wealth by $2.4 trillion in just the Third Quarter, according to the Fed’s latest Flow of Funds report.  Most of it comes from the housing bust. We also still see deflation in wages and salaries, but that is counteracted by retailers’ discounting.

Overall retail sales in November grew 0.2 percent, following a 0.6 percent boost in October (originally up 0.5 percent) and a 1.3 percent spike in September (previously up 1.1 percent). Retail sales on a year-ago basis in November rose 6.7 percent, compared to 7.5 percent in October. Excluding motor vehicles, sales were up 6.6 percent on a year-on-year basis, compared to 7.5 percent the month before.


Graph: Inside Debt

So once again, as with jobs, the numbers were higher than initially reported. Overall components were largely favorable. The strongest component was electronics & appliance stores which jumped 2.1 percent in November, followed by nonstore retailers (up 1.5 percent) and auto dealers (up 0.5 percent). Also seeing gains were furniture & home furnishing, clothing & accessory stores, sporting goods & hobby, and general merchandise.

The Labor Department’s October Job Openings, Layoffs, and Turnover Survey (JOLTS) report also looked good, with 3.27 million job openings. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in October was 1.2million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 35 percent since the end of the recession in June 2009.


Graph: Wrightson ICAP

But will consumer spending hold up in 2012? Since consumer confidence is rising from the mid-year pessimism of congressional gridlock, Japanese Tsunami, and S&P credit downgrade, it looks like that will happen—that is if real incomes can keep up with inflation. Consumer optimism is higher in both the Conference Board and University of Michigan surveys.


It is particularly hard to understand why we are still in a disinflationary environment, when energy and food prices fluctuate so much. The largest factor taming inflation is almost no increase in labor costs. This is because wages and salaries—which make up 80 percent of personal incomes and two-thirds of product costs—aren’t exceeding inflation, while housing prices are still falling. And corporations are hoarding some $2 trillion in cash, while banks now have $1.8 trillion in excess reserves they are not spending or lending. With so little money in circulation—whether from wage earners or corporate spenders—prices cannot rise much.


We should understand that the experts badly overestimated economic growth at the beginning of 2011, then underestimated it by midyear—which means that we were never in danger of a second recession. The best example is our unemployment numbers. From June onward, both private payrolls and self-employed jobs have been increasing at almost 300,000 per month, which is close to pre-recession levels, while initial payroll formation showed zero or almost zero job growth in August-September before it was upgraded.

And the household survey component of the jobs report including the self-employed – an actual headcount of working Americans – has shown a gain of 1.28 million over the past four months alone. And that—with the S&P credit downgrade and euro worries—is what set off new recession talk.


Payroll jobs in November advanced a relatively strong 120,000 after gaining a revised 100,000 in October (originally 80,000) and increased a revised 210,000 in September (previously 158,000).  So look for upward revisions once again.  Private payrolls (less government layoffs) gained more than overall, up 140,000, following a 117,000 increase in October and 220,000 rise in September.

And back to back declines of 19,000 in initial jobless claims are also signaling sudden strength in the labor market. Claims in the December 10 week came in at 366,000, far below expectations for 390,000 and compared to 385,000 in the prior week (revised 4,000 higher). The 366,000 level is the lowest since May 2008. The four-week average is down 6,500 to 387,750 for the lowest level since July 2008. The average, in a convincing sign of strength, has been down in 10 of the last 12 weeks, said Econoday.


Why has consumer spending held up? By the expansion of consumer credit, up $7.6 billion in October following a revised $6.9 billion increase in September. The increase is once again centered in non-revolving credit, which reflects strength in vehicle sales. But a steady increase is now appearing for non-revolving credit, up $0.4 billion for a second consecutive month and offering evidence that consumers are once again, at least to a limited extent, using their credit cards.


The latest report from the Institute for Supply Management also added to growth estimates as the manufacturing sector is regaining momentum, and confirmed by the latest Empire State and Philadelphia Fed business activity surveys.  The ISM manufacturing index moved further into positive territory, rising 1.2 points in November to a reading of 52.7. The gain in the index was led by a 6.5 point jump in the production index to 56.6.  Importantly, the new orders index was up a very strong 4.3 points to 56.7, above 50 to indicate monthly growth and pointing to continuing momentum.


Service sector growth is lagging somewhat, since it is a function of domestic demand, where manufacturing is fed by exports to faster growing countries, mainly in Asia. The non-manufacturing ISM index “decelerated” to 52 from 52.9 percent, but the business activity/production index gained 2.4 points to 56.2.  And the new orders index advanced 0.6 point to 53.0.  New orders are still sluggish—being only moderately above breakeven—but do suggest continued gains in production in coming months, according to Econoday.

Lastly, Gross Domestic Product estimates, the best measure of overall growth, are being revised upward to 3 percent plus next year by economists, after the mid-year scare. So this also means more job creation if those forecasts are fulfilled.


Graph: Calculated Risk

The bottom line is that even with the many difficulties, consumers continue to spend, which means a better looking 2012. In fact, it doesn’t look like even congressional gridlock can do much more to limit growth. This is because if the Bush tax cuts of 2001, 2003, and 2006 were extended past 2012, it would increase the deficit by $3.7 trillion over the next decade, according to CNN. Whereas letting the cuts expire on December 31, 2012 would reduce the federal deficit by 40 percent over just the next five years.

Harlan Green © 2011