Category Archives: KAA Blog

Retail Sales

Total retail sales dropped by 0.2% in May as compared to April 2012 according to the Census Bureau’s advanced monthly release. This number may not be as negative as it appears at the first glance. In the first place it is 5.3% above May 2011 which is not all that bad. However, the detail analysis of the components of this number may shed more light on the concept.

The largest decline of components of retail sales was a 2.2% drop in expenditures on gasoline in May. Interestingly enough, this does not mean that we have purchased fewer gallons of gas in May compared to April. That is because the average price of gasoline dropped by 4.3% between the two months (according to the DOE), thus despite the drop in amount of payment for gasoline, we probably purchased
more gallons in May than we did in April.

Building material & garden equipment category, however, shows a significant drop of 1.7% between the two months. This is a leading indicator for the housing market. And it indicates that the housing sector is still far from recovery.

Further analysis of the details of Retail Sales shows that purchases of motor vehicles, electronic & appliances, clothing and particularly, the nonstore (Internet) retail purchases has increased significantly. All-in-all, while the overall May retail sales numbers dropped below expectations, in actuality this indicator was positive for May. Despite a significant drop in the building material purchases, it showed growth, particularly in the discretionary expenditure categories.


New orders for consumer durables

Consumer products that are expected to last a few years are called consumer durables. These include appliances, automobiles, TVs, etc. Consumer durables act as a bellwether of economic cycles.

Consumer products that are expected to last a few years are called consumer durables. These include appliances, automobiles, TVs, etc. Consumer durables act as a bellwether of economic cycles. During recessions, people reduce their purchase of consumer durables due to two basic reasons; one is the fact that these are usually higher priced products. Recessions leave most people with less cash and higher uncertainty. Thus the purchase of these higher priced goods will decline. Second; by their nature, consumer durables last a few years, so during periods of uncertainty, people tend to use these products a while longer without significant loss of utility. By the same token, during recoveries, demand for consumer durables rises, reflecting higher income and confidence levels.

New orders for consumer durables were running between $34b to $36b per month during the economic boom of 2003-2007. The Great Recession crushed this category down to around $20b per month by June 2009. This was 35% below June 2008 and 47% below the March 2003 highs for this index. New orders for consumer durables has been rising at a healthy pace since June 2009. In March 2012, this indicator rose by 38% above its June 2009 lows, however, it is still 27% below its March 2003 highs. Economic recovery along with low interest rates are slowly persuading consumers to get back in the consumer durables market.


Commercial loans up significantly

The decline in lending has ended and banks are consistently adding an average of $15 billion a month
to their commercial and industrial loan portfolios.

The volume of commercial and industrial loans at all commercial banks dropped rapidly as the result of the Great Recession. In October 2008, the total of commercial and industrial loans was $1,608 billion. By October 2010, this number had dropped to $1,204 billion. More than a quarter of these loans were wiped off the asset side of bank ledgers. While only some of the decline was due to the default, all of the income generated form those loans was lost.

Starting in November 2010, the volume of commercial loans started to climb, although still 8% below their previous year. The trend reversal has been continuos since then and by March 2012, the level of commercial and industrial loans has increased to $1,394 billion, 13% above March 2011’s level and only 13% below its all time high in October 2010.

This is a major recovery, however, it should be noted that even at this rate, it will take until April 2013 for the total of commercial and industrial loans to reach their 2010 high.

While the economy is recovering, the rate of recovery is nothing like what we have been used to over the last half a century. The Great Recession was deeper and more devastating than anticipated. Most forecasts, underestimated the rate of decline and projected much faster recovery. The Great Recession, was more than a recession, that’s why all the estimates based on previous recessions forecast faster and stronger recovery. If we change our calculus to compare this with a depression, then our forecasts will be much closer to the reality.

The recovery will continue and the economy and even the housing market will get back to normal. It is, however, important to recognize that this will be a new normal and it will take some time to get there.