Weak Drivers of Retail Spending Demand Attention

The steady recovery in the Big Three automakers’ domestic car sales has been one of the unexpected success stories of the post-recession period. While the appropriateness of the industry’s bailout by the US and Canadian governments can be debated, the subsequent increases in sales volume, hiring, and company valuations have exceeded all but the most optimistic expectations.

The impact of new car purchases can be seen in pocketbooks (personal income in Michigan grew last year at its fastest pace since 2000) and in the national retail-spending tally. Rising about 7 percent from a year earlier, autos and auto parts accounted for one in five US retail dollars in February. The relative robustness of the auto sector has been sufficient to factor into the economic accounts, as well, where it made a outsize 0.83 percentage point contribution to the fourth quarter’s 3.0 percent annualized GDP reading.

Spending With Borrowed Dollars

How are car sales relevant to the bricks and mortar retailers whose shopping centers and malls are unlikely to host an auto showroom? Apart from the disposable income related to the 220,000 trough-to-current jobs created in the sector, an unexpectedly large slowdown in March vehicle sales highlights the difficult position of American households that are borrowing anew to support spending.

As consumer confidence in the recovery has firmed, spending growth has surpassed income gains. The latter has been tempered by a weak job market and faces new threats from the scheduled expiration of tax breaks at the end of 2012. Weary of deleveraging and the implied avoidance of the shopping mall, American consumers have closed the gap between spending and income by lowering their savings rates and drawing on relatively cheap credit. This trend is unsustainable in the medium-term.

The most recent data, exaggerated somewhat by the rise in gas prices, makes the imbalance clear. US households’ real disposable income fell by 0.1 percent in February.  Real consumption, however, increased 0.5 percent over the same period. The difference is reflected in February’s 3.7 percent savings rate, down from 4.7 percent just two months earlier. In the first two months of the year, consumer credit outstanding increased by $27.3 billion. Current debt service ratios have been declining, but these measures internalize historically low interest rates that will not persist indefinitely.

Can consumers sustain their contribution to the retail sector and to the broader economic recovery? The question is central to the economic thesis since, without consumers, a strong recovery is unlikely if not impossible in the context of our current growth model. And so it falls to jobs. A finite capacity to carry debt, including student loans, requires much stronger hiring and wage and salary trends than we have observed thus far. While many retailers are currently enjoying the upside benefits of consumers’ renewed confidence, debt-fueled spending is no substitute for a badly needed recovery in employment and income.