Retail Sales Post Depressing Drop

The American consumer is in a state of depression. I am not just talking about their mood after opening their quarterly brokerage account. The U.S. Census Bureau released the Retail Sales figures for December 2008 today. Adjusted for inflation, Retail Sales plunged in December by 2.7% compared to November and by 10.2% compared to a year ago. Economists were expecting a 1.2% drop compared to November. This is the largest annual drop since July 1951 (which was an aberration due to a very high increase in July 1950). While the NBER has declared the American economy to be in a state of recession, we are a long way off towards being a depression. Some economists define a depression as real GDP declining by 10% over a year. Retail Sales, however, have now entered into depression levels.

This current decline in Retail Sales is a result of a change in dynamics. For years, America has maintained a trade deficit, importing more goods than exports. This deficit has been funded by increases in personal income. The net result has been a positive increase in lifestyle that was sustainable. After the 2001 recession the dynamics changed. The trade deficit took off while personal income was slow in recovering. Consumer spending was no longer sustainable.

Consumer spending was being supported by changes in household net worth. The Federal Reserve publishes a plethora of information including the Balance Sheet of Households and Nonprofit Organizations in their quarterly Flow of Funds Report. From 1970 to 1994, U.S. Households averaged a gain of $2.0 trillion (in 2008 dollars) in household net worth each year. From 1995 to 1999 that increased to an average of $4.6 trillion in gains a year. During 2000 to 2002, net worth dropped by an average of $609 billion a year. But from 2003 to 2006, stock prices recovered and the housing boom took off. Household net worth went up an average of $5.9 trillion a year. Consumers, propped up with enormous paper gains continued spending even though it wasn't supported by gains in personal income.

In 2007, the financial crisis erupted. From the fourth quarter in 2007 to the third quarter of 2008, the net worth of U.S. households declined by a horrific $7.15 trillion. The S&P 500 declined by 22.5% in the fourth quarter. Housing also started declining faster last quarter. When the Fed reports the latest Flow of Funds report in March, the total loss in net worth through the fourth quarter will likely be over $10 trillion. Obama's $800 billion stimulus and the remaining $350 billion in TARP money pale in comparison to the losses sustained. Fears of rising unemployment are also affecting the consumer. We have entered into a new era; U.S. consumer spending will continue to face pressure to come down to a sustainable level.

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