The U.S. economy has been very effective at punishing anyone who has become overly optimistic. We get a few quarters of decent growth and then, wham -- an unforeseen contraction in the first quarter of this year. The latest smack in the face: The government says retail sales were unchanged in July. No, we're not talking about activity that's keeping pace with inflation. We're talking no improvement. Just a big fat zero. A goose egg.
"Remember the phrase 'shop 'till you drop'? Well, forget about it. Consumers are not shopping very much at all," says Joel Naroff, chief economist at Naroff Economic Advisors.
The consumer is supposed to be the machine powering the U.S. economy, responsible for nearly three-quarters of economic activity. If those gears fail to grind, we have problems.
Consumers take a timeout
So, as the third quarter began, consumers were largely on the sidelines. One of the biggest problems involves the widely-discussed issue that wage growth has failed to accelerate. The U.S. has enjoyed a string of solid payrolls reports with employers adding more than 200,000 jobs in each of the last six months. But that hasn't been enough to get consumers off the couch.
"Recent news on jobs added to the economy and consumer confidence has been favorable, but consumers are still relatively cautious," says Chris Christopher, director of consumer economics at IHS Global Insight.
Beneath the goose egg in the headline, there wasn't much to brag about beneath the surface of the retail sales report:
- Excluding cars and car parts, sales were up by a meager 0.1 percent.
- At furniture, home furnishings, electronics and appliance stores, sales were down 0.1 percent.
- So-called general merchandise stores saw sales drop 0.5 percent.
For sellers of clothing and clothing accessories, there was a gain of 0.4 percent, making it one of the few categories with a low single-digit increase.
Auto sales have been strong this year, but they've been fading recently. "We knew that vehicle purchases eased from the robust June sales pace, but that is hardly a concern as they are still at a very strong level," Naroff says.
For the Fed, permission to go slow
Where does this leave the Federal Reserve, which is pledging to leave interest rates relatively low as long as the economy behaves like a problem child? Mesirow Financial chief economist Diane Swonk writes, "A slump in retail sales will provide Federal Reserve Chair Janet Yellen with some of the rationale she needs to justify why the Fed should move gradually and keep interest rates low for longer than hawks within the Fed would like."
Many economists predict annualized growth in the economy will proceed strongly through 2015, which would be something to celebrate. Next, consumers will need to know they've been invited to the party.
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