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By New_Deal_democrat January 31, 2014 6:03 am
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Patterns of consumer spending show expansion to continue

In the past I've noted that <a href="http://bonddad.blogspot.com/2012/03/consumer-spending-pattern-does-not.html">comparing the performance of</a> personal consumption expenditures and real retail sales is a good way to see where we are in the economic cycle.

Below is a graph comparing the two by subtracting YoY PCE growth from YoY real retail sales growth, through 1997.  Note that the two interrelate in a very specific and non-random way:

Early in economic expansions, YoY real retail sales growth far outstrip YoY PCE growth. As the economy wanes into contraction, YoY real retail sales grow less and ultimately contract more than YoY PCE's. You can see that retail sales minus PCE's are always negative BEFORE the economy ever tips into recession. That's 11 of 11 times. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession. This makes perfect sense, as retail sales generally include many far more discretionary purchases. As the economy accelerates, consumers make more discretionary purchases. As it slows, the more discretionary retail purchases are the first things cut.

So, where do we stand now?  Here's an update of the same graph from 1997 to the present:

YoY retail sales are still stronger than YoY PCE growth.

Similarly, while retail sales as a whole tend to plateau before recessions, measured per capita they are a good leading indicator, as households pull in their horns as to retail spending, which is part of what precipitates a recession.

Here's real retail sales per capita for the last 20 years:

These too are still improving.

Both of these measures show us right now the economic expansion is in good shape.

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