Analytical Wealth

Continuing on with the discussion around retail and consumer spending: April’s consumer spending numbers were not only seen as positive by many, but as a possible sign that the chances of a recession in the U.S. were decreasing.

Graphic courtesy of the WSJ

There are a couple of problems with this line of reasoning:

1. The Commerce Department’s retail spending numbers are reported in nominal terms/are not adjusted for inflation, since even the Fed’s nonsensical inflation number is greater than 0.5% that means that real consumer spending declined on a YoY basis.
2. Continuing with the argument around inflation: higher prices for gas and food should be causing retail spending to show a significant increase on a nominal basis.
3. Gasoline sales were up 16.3% YoY and Grocery Sales were up 5.7% and there seems to indicate a strong inflationary component in those numbers, especially since there are signs that people are cutting back on gas purchases.
4. Something to consider about consumer behavior: if a household cuts back on a typical purchase it creates a deficit that has to be filled in the future, as a result “YoY spikes” can be created when people make “catch-up purchases” in Month B that they didn’t make in Month A.  
5. If you combine March and April’s numbers we’re relatively flat compared to last year even on a nominal basis, and it’s the medium term trends that are most important here.

Looking at the above the only conclusion to make is that not only are people spending less (in real terms) but they’re receiving fewer goods per dollar than they were last year, which at the household level means recession no matter what an economist says. For the consumer spending number to be truly positive it needs to indicate that consumers are spending more of their disposable income AND receiving more goods per dollar, as that would indicate a YoY positive improvement in their financial situations.

A more fair assessment is that the chances of a recession are about the same (if not greater) when you consider how the economy is impacting households on aggregate. The economists that believe that the U.S. faces less chance of a recession should talk to the people who plan to spend their stimulus checks on food and gas; not to mention the fact that very few people plan to spend their checks on discretionary items.