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By New_Deal_democrat August 14, 2014 8:01 am
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The slow fade of the consumer

One of the graphs I have run over and over again is the one showing that, since 1980, each recession has occurred only after a 3 year period when interest rates did not make a new low.  Generally this means that if real wages aren't increasing, if a widely held asset like stock market 401k accounts or housing isn't appreciating to new highs, and if falling interest rates don't permit the refinancing of existing debt at lower monthly payments, consumers have pulled back, triggering a recession.

Let's acknowledge that both housing prices and the stock market have increased, the latter to new highs, since the Great Recession. But we are over two years since the last new low in interest rates.  So while there hasn't been a pullback by consumers, there has been a slow fade, evident in yesterday's retail sales report.

By now you know that nominal retail sales were flat in July.  We won't know about real retail sales until the CPI report next week, and with the decline in gas prices, a flat or declining CPI isn't out of the question.

To begin with, here is an update, including yesterday's retail sales number, of retail sales compared with personal consumption expenditures:

As I have previously noted, it is something of a (roughly) mid-cycle marker when YoY retail sales begin to trail YoY personal consumption expenditures. It looks like we reached that point at the end of last year.

Further, in virtually all cases in the last 50 years, real retail sales per capita peaked at least 12 months before the onset of a recession, which means they turned negative YoY by recession onset.

Here is the YoY% change in real retail sales for the last 20 years, through June:

The slow fade from 2010 to now in the strength of sales, from 5% to under 2.5% to under 2% is evident.

To make the slow fading trend even more apparent, here is the same data, averaged quarterly, since the beginning of 2010:

Even with the bounce back in the second quarter, average real retail sales per capita for the first 6 months of this year are only up 1.2%.

If the consumer's slow fade continues, then we have to get much more concerned about the  economy beginning in the second half of 2015.  That being said, let me conclude this piece on a note of positivity, in the form of interest rates:

Over 1/3 of the big increase in rates a year ago has been taken back.  Decreased interest rates will help some consumers.  If higher interest rates slowly fade as well, then the 3 year deadline might be met after all.

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