A Look Ahead at the Holiday Shopping Season: Reasons to Worry

The major reason to worry this holiday season should be fairly obvious: weak growth and a sharp decline in consumer confidence.  The consumer is facing quite a lot of uncertainty with persistent high unemployment and a sour global economic outlook, and this has caused quite a lot of worry about the upcoming holiday shopping season.

The National Retail Federation is forecasting that retail sales will be up 2.8% from last year, but according to this article in a recent New York Times, ports around the country are seeing significant drops in cargo volumes from their peaks last year.  Retail firms place orders and cargo begins to peak around August and September in ports.  The Port of Long Beach, California is reporting a 14-15% drop in volume.  It should also be noted that rail car loadings are slightly up from last year at this time.


Seattle (photo: Steve Johnson)

A second reason to worry about retail sales is a noticable shift in consumer behavior in the past few years.  Consumers aren't spending as much time in stores, and they are more likely to know what they want to purchase before entering the store.  This makes firms' efforts to entice consumers to make extra or impulse purchases more difficult.

According to a recent survey by the retail research firm, ShopperTrak, consumers are making an average of only three stops on their shopping trips.  That figure is down from five before the recession hit.  ShopperTrak is estimating a decline in foot traffic of 2.2% overall this holiday season.  Much of this decline is being blamed on the internet.  Many consumers are doing research about the products that they intend to purchase online and come to the store with a strong idea of what their purchase will be.  They then purchase that item and leave without browsing.  There is more information on this topic at this Bloomberg.com article.

Clearly the consumer is more empowered by information on the internet, but the retailer is left reeling unless it can find a new way to return more browsing to the marketplace.  Overall, it looks like another difficult holiday season for retail, and especially so for brick and mortar retail.

Arab Strap - "I Would've Liked Me A Lot Last Night"

Gap Between Consumer Confidence and Consumer Spending Suggests???

One might observe many individuals being increasingly nervous about the economy in the past couple months.  The news has been pretty bad with the U.S. debt downgrade, near default, terrible uncertainty in Europe, and overall economic stagnation in the United States.  Ordinarily when consumers have news that is this bad, they tend to reign in their spending in step with their attitudes and expectations.  The chart below is a peculiar chart that shows the  relationship between consumption and consumer confidence.  It shows that there is currently a significant gap between the two.

One might also note that the consumer confidence is a leading indicator of spending.  So might this suggest we will see a tightened wallet in the coming months?  That is very likely, but there certainly is a prolonged divide happening as well.  What could this suggest?  Could this be the effects of fiscal and monetary stimulus?  Consumer expectations of inflation?

Does anyone else have a better idea about what this chart is telling us?

The Recession That Never Ended

The United States has been out of recession since June 2009 according to the National Bureau of Economic Research (NBER).  Many Americans have not been helped by this recent economic growth as unemployment has remained above 9%, and long term unemployment has become a lingering and concerning problem.  Many pundits have been speculating that we may be double dipping back into recession, while others including Harvard's Kenneth Rogoff are contending that we never really exited the first one.

There is more than one way to skin a cat, and hundreds of different ways to mark growth or lack thereof.  The most common and official way to mark a recession is two continuous quarters of negative economic growth, with the recession ending as soon as positive growth is sustained.  Another way to measure a poor economy is the return to pre-recession employment levels.  We are still a long way from recovery by that standard.

This graph is from the website, Calculated Risk.  I think it paints a frightening picture of how far off from pre-recession levels that we still are at.  This employment contraction is enormously deep and enormously longer in duration.  If we do enter another sustained period of GDP negative growth, it will be historically merged with the recession that we just got out of in terms of return to peak employment.  Henry Farber wrote, "It is clear that the dynamics of unemployment in the Great Recession are fundamentally different from unemployment dynamics in earlier recessions."

One thing that I also take from this recession is that while modern monetary policies can be shown to have fewer recessions than previous monetary policies, their duration is getting longer.  The three longest contractions in employment are also the three most recent.  All of them pale in comparison to the unemployment problems of the 1930's.  It took them over a decade to return to the <5% rate that they had before 1929, and even then it was largely because of the armed services drafting individuals.  That can still be considered the outlier of all outliers in terms of post industrial revolution economic history.  There is one possible commonality.  If we do go into a second recession, our employment contraction will last over both of them, just as in the Great Depression and the recession of 1937 had two distinct recessions, but unemployment never returned.  The sad fact is that the 1930's unemployment had a better (if still unsatisfactory) bump in employment between 1933 and 1937 than we have had between 2009 and today (which perhaps says something about the New Deal versus the Stimulus).

This data points to a good research topic: why are modern contractions in employment lasting longer?  Is this simply a natural trade-off for monetary and/or fiscal policymakers?  Has the U.S. labor market become less flexible or resilient to or during contractions?  Is it a simple coincidence?

Christina Romer wrote a couple papers in the 1990's that dealt with recessions in terms of peak to trough.  She was dealing with a historical industrial index peak to trough.  One of them is "Changes in Business Cycles: Evidence and Explanations" (gated) which appeared in The Journal of Economic Perspectives in Spring 1999.  These studies show the effects that macroeconomic policies have had on contractions.  They have become less frequent, but longer in duration.  Recessions before macroeconomic policy making went into effect (1930's) were shorter with the only very long one (longer than 60 months peak to trough) happening in 1887.  This problem of prolonged employment contractions seems (particularly) to be getting worse.  Her studies can and should be updated to include this most recent and abnormal recession.  If macroeconomic policies are to be continued, we should attempt to alter them for these length problems, especially with regard to employment.

All of these numbers are incredibly depressing, but it is always important to remember that we've gotten out of every recession in the past and we will see sunnier days again!

Modern Monetary Policies... and the Rules that Govern Them

This is the final essay that I wrote for my Economics and Public Policy Synthesis.  It can be considered useful for someone looking for an introduction to central banking, monetary economics, or some of the recent plans and Fed policies.

Did We Kill the Golden Goose?

The American Armageddon was averted earlier this week when Congress and the President reached a deal to raise the debt ceiling and avoid defaulting on its obligations.  Since the deal was reached, many on both sides are fuming about various aspects of the deal.  Presidential candidates are already using it to position themselves to constituency and the world is still turning.  One of the questions that is being brought up in the wake of falling stock markets and general media inquiry, did we kill the golden goose?  Will we lose our AAA bond status?  Are bond purchasers going to be less attracted to our securities?

Chart 1 - Dow Jones Industrial Average (7/29/11-8/4/11)

Chart 1 shows the Wall Street sell off this week.  Is this sell-off because of insecurity about the U.S. government paying its bills based on resistance to raise the debt ceiling?

Chart 2 - Dow Jones Industrial Average (8/3/09-8/3/11)

You can see the market has been climbing quite a bit in the past year.  I suppose our outlook has grown rosier in the past two years, but perhaps it is getting more pessimistic with job numbers at almost negative growth and GDP about the same.  Market bull runs tend to take on a momentum of their own and continue past the point that economic indicators begin hinting at weakness, so perhaps the market is finally succumbing to neutral economic indicators and is beginning to feel alarmed.

Chart 3 - One Month Treasury Note Rates (8/3/09-8/3/11)

Please note the scale on Chart 3, the reason that it looks as variable as it does is only because of how little variability there actually has been in it.  If one view this graph from before the recession began, it looks quite different.

Chart 4 - One Month Treasury Note Rates (8/3/02-8/3/11)

This graph gives a bit more history to the debate.  What I notice is how closely it follows the Federal Funds rate that the Federal Open Market Committee sets.  This makes sense because the main way that the Fed does this is through Treasury Note repurchase agreements with Treasury Department primary dealers.




Chart 5 - Federal Funds Effective Rate (8/3/02-8/3/11)



The grey portion in Chart 5 shows a period of recession.  The Federal Reserve's Federal Open Market Committee meets once every seven weeks (roughly) to decide whether to raise or lower interest rates.  They then set a target rate, and it is up to the traders at the Fed Board and regional Reserve Banks to meet that target.  It's easy to be oblivious to the ways in which the government intervenes in our markets.  But these last two graphs show pretty well why the U.S. Treasury bond market wouldn't and perhaps couldn't react to any insecurity over a potential U.S. default.

Chart 6 - 100 Oz Gold in Dollars (5/3/11-8/3/11)

This chart shows the price of 100 ounces of gold over the past three months.  I use this chart to show the decline of the Dollar.  One could argue that there is a significant speculative market in gold, but I would counter that this speculation is actually a short on the major world currencies.  Surely these speculators are not guessing that the demand for gold jewelry has risen 10% over the past month!

Ordinarily, when someone is trying to show weakness in the Dollar, they would compare it to another world currency such as the British Pound, Japanese Yen, or more recently the Euro.  This would be fine, but the Dollar has been somewhat on par compared to these currencies because most developed economies are in lackluster shape and sovereign debt levels are high for most of these countries.





So have we killed the golden goose?

Many are speculating the Republicans have killed the golden goose by showing that Congress may not have the political will to pay back its debtors.  I think this is attacking the wrong problem.  Even if we had not had this debacle with the debt ceiling, I think it is likely that we would be facing credit rating downgrades.  The reason we will face those downgrades is because our debt to income to ratio has been  quickly rising.  Our prospects of lowering it, or even significantly slowing this rising ratio only came about because of Republican hold-outs last week.  The truth is the the U.S. debt rating has already been lowered by one agency that I know of (大公国际资信评估有限公司, in China).  It is the largest credit rating agency in China (I don't know if that means anything) but I don't know if that has truly affected rates.  Then again I'm not sure that even a Moody's downgrade will affect us after looking at that Federal Funds Rate (Chart 5) compared to Treasury One Month Rates (Chart 4).  It appears that the Fed is willing to do whatever it takes to hold down Treasuries.

All this sort of exposes the United States as becoming a banana republic.  The government spends our money, and then taxes us through the backdoor via inflation.  I've long wondered that with the United States having such a large debt for so long, what it would take to go bankrupt.  It seems to have a bottomless pit to borrow and repay yesterdays loans (read: ponzi scheme).  It seems then that the true way that the U.S. Federal government would ever go bankrupt is by holding a Treasury bond auction that nobody came to.  So perhaps we have killed the golden goose, but not in a way that is at all obvious, yet.