Back in November of last year, we began to publish a data series that has been reasonably predictive of retail sales performance by correlating retail sales growth data with consumer credit expansion and contraction. We use a trailing 3-month, seasonally adjusted, rate of change in both aggregate consumer credit and retail sales, to chart what we have referred to as “micro-cycles” of consumer credit de-leveraging and re-leveraging as a principal driver of consumer spending, in an environment in which (i) wage growth is negative on a real basis and flat on a nominal basis for the overwhelming majority of workers, and (ii) the amount of aggregate credit being extended to consumers (credit availability) is capped out by the generally poor condition of household balance sheets.
Below is a graph updating this series and illustrating that, after the first period of actual growth in consumer credit (beginning in Q4 2010), we may have once again maxed out our collective credit cards – with a resulting retrenchment in retail behaviour now underway.
We contend, in our original report on this series, “Retail Sales as Echoes of a Pre-Crisis Habit” (November 18, 2010), that pre-crisis bubble growth in the economy was substantially enabled by (and is an unsustainable reflection of) an unprecedented growth in credit of all types. After years of profligacy, households began to have difficulty carrying their debt loads beginning in Q1 2007 and, by Q2 2008, the debt bubble burst and the crisis ensued.
Since Q4 2009, we have experienced a series of micro-cycles as consumer reached again for plastic (and, as auto sales recovered, instalment loans), leading to a fairly robust expansion in retail activity as our 3-month trailing growth rate finally turned positive about 8 months ago. Consumer behaviour then began to echo pre-2007 habits, albeit with substantial constraints on their ability to re-leverage.
But, again, we have our doubts that activity in the real economy is sufficient to sustain this pattern, as we noted in November: Expansion and contraction of retail sales in the post-panic U.S. economy has been predominantly the result of fluctuations in the use and repayment of consumer credit facilities, not the normal recovery patterns expected following a garden-variety recession. These activities principally represent the overall recent patterns of consumer saving, punctuated by periodic dis-saving as credit facilities free up, are employed again, and then must be paid down anew.
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Photo: Daniel Alpert
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