- by New Deal democrat
It’s that time of month again for my favorite indicator for the consumption side of the economy: retail sales have been tracked for over 75 years. When they are lower YoY, that has historically been a good (not perfect) indicator that a recession is near. That’s because that same 75 year history empirically demonstrates that consumption leads jobs. In other words, it is the change in sales that causes employers to add or lay off employees (not the other way around, as I have sometimes seen claimed).
They are somewhat noisy, especially around the Holiday season, and they do get significantly revised, both of which were apparent in January’s report. In nominal terms, retail sales declined a sharp -0.9%, but December was revised higher by +0.3%. Since CPI tagged a strong 0.5% in January, that means real retail sales declined -1.3% for the month. Because I had the genius thought several months ago that because shelter prices (i.e., house prices and rent) were distorting CPI, maybe they were distorting the signal from real retail sales as well. So they are included below in light blue as well. Note the graph is normed to 100 as of just before the 2021 pandemic stimulus:
When we take out shelter, real retail sales show a solid uptrend since July 2022 (when gas prices were $5/gallon). Note that the December/January numbers have shown the sharpest m/m changes for each of the last three years. I am thus inclined to treat this month’s big decline as unresolved seasonal noise unless there is confirmation next month.
The best recession vs. expansion signal is the YoY% change in sales, which - pretty much until the pandemic - almost always forecast an imminent recession when it turned negative. Again, when we take out the distortions caused by shelter, the false recession signal almost completely goes away:
Even with January’s downturn, the forecast is for continued expansion.
Finally, because consumption leads employment, per the above paradigm, here is the update on that:
With the downward benchmark revisions in employment numbers for the past year, the two series are coming much closer to being in sync. While the forecast remains for positive employment reports, the suggestion from real retail sales is that there is likely to be continued deceleration in the YoY comparisons. In early 2024, the average monthly gain in employment averaged 180,000, so per this model I am expecting the next few months of job gains to average less than that.
