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Early Green Shoots
By: Dr. Charles Lieberman
Date: 3/16/2009
Retail sales have been far stronger than expected for the second consecutive month, suggesting that consumer spending might be stabilizing after plunging at a 4% annual rate (in real terms) in the second half of 2008. Another decline in GDP in the first quarter is highly likely, reflecting ongoing cuts in production and business spending. However, the decline in GDP should be significantly more moderate and its composition should be more favorable, as better-than-expected sales depresses inventories. Sometime soon, this inventory liquidation will cease. And the timing of the fiscal stimulus, plus various initiatives to help the credit markets, should provide a foundation for the start of an economic recovery.
Retail sales for January and February are above the average for the fourth quarter, suggesting that the worst of the decline in household outlays is behind us. Although ongoing job losses remain sizeable, wage growth is holding up and inflation remains modest. Thus, moderate gains in household income are not being wiped out by rapidly rising prices. Consumers have the ability to increase spending, although perhaps not much will as yet, reflecting widespread concerns over the health of the economy. The means to increase spending will get another boost in April, as the fiscal stimulus package is implanted via reduced tax withholding. Various other aspects of the stimulus package will also help spending.
The lift to consumer spending so far this quarter came as a major surprise, as most analysts expected ongoing weakness. These negative expectations are reflected in the additional declines in industrial production and employment. This disparity implies that inventory liquidation might be massive in the first quarter. Reduced inventories will depress reported GDP for the first quarter, but set the stage for a rebound in production in the coming quarters. And this need for increased production will be reinforced by the government's fiscal stimulus package.
These spending trends will be undermined however, if the credit markets do not continue to improve, hence the importance of the Fed's efforts to unfreeze capital markets. The TALF is still undergoing changes, even though planning has been underway for several months. But it is critical to provide credit to the asset-backed market for credit card, student, and auto loans. Mortgage credit has improved considerably, as 5% conventional 30-year fixed-rate financing is now available and the Fed is still buying mortgages. The Fed's work is hardly done, but spring is near.
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