Pent-up Demand: Too Soon for a Sustained Recovery?
Consumer spending accounts for more than two-thirds of the economy (GDP or economic growth). Therefore, monthly data releases give a good idea of where the economy might be heading before quarterly reports.
This is from Bloomberg’s Why Investors Care: “The pattern in consumer spending is often the foremost influence on stock and bond markets.”
However, there’s another interesting relationship between consumer spending and the labour market. By plotting the initial unemployment claims (4-week moving average) and retail sales (excluding food services), there seems to be an important link between the two.
The following charts include both series. The first one uses monthly data going back to 1992 while the second one uses the monthly data from January 2009 to March 2010 and weekly data from 2010 week 14 to week 18.
Overall, the graphs suggest that the series are strongly related. But most importantly, the second graph shows that initial claims have stop falling in the past weeks. That would suggest that the retail sales (y/y %) should decelerate slightly during the corresponding period.
What does it all mean? Well, based on those few new data points, it could be interpreted as retails sales coming in at a slower pace for April (to be released Friday May 14th), meaning that the latest increase in consumer spending was indeed pent-up demand, hence the economy could encounter a slowdown as soon as Q2-2010; that being said, Q2-2010 could still be a quarter of somewhat strong growth due to the final steps of the stimulus package.
As a whole, it does not suggest a doomsday scenario, but it does raise concerns about the sustainability of the current recovery. At some point in time – rising stock market or not – consumer spending will again depend on income growth. For that to be the case, the labour market will have to recover in a significant manner (which isn’t what we are seeing right now).
Retail sales were up 9.6% from April 2009 (y/y %). On the graph, retail sales flattened out, following the pattern of initial claims. Though sales did not decelerate, I still expect them to do so given that the labour market should continue to show a fragile recovery.
Important and interesting update:
This is from Mark Thoma via email: “I think the main question is whether the relationship [between initial claims and retail sales] is causal, in which case it’s useful for forecasting, or if both series are being driven by something else (e.g. overall economic conditions) in which case, for forecasting, it’s important to identify the primary causal variable.”
More to come on the issue…
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