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By New_Deal_democrat June 12, 2015 9:23 am
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Updating 2 midcycle consumer spending indicators

Ultimately I would like to have a set of indicators to describe an entire business cycle: long leading, short leading, coincident, short lagging, long lagging, and mid-cycle.  A mid-cycle indicator is one that turns roughly in the middle of an economic expansion.  It is a way to focus attention.  Are we in the first part of an expansion, or are we at a point where we should begin to watch for a turn down in long leading indicators?

In this post I want to update 2 series which appear to make good mid-cycle indicators: retail sales vs. personal consumption expenditures, and the personal savings rate minus the inflation rate.

 
First, three years agoI identified a consistent pattern whereby retail sales grew faster than the broader category of personal consumption expenditures early in an expansion, but slower later in an expansion.  Retail sales constitute about 50% of PCE's.  Note, however, that real retail sales are much more volatile. And, as this graph below (subtracting YoY PCE growth from YoY real retail sales growth through 1997) shows, in a very specific and non-random way:
 
 
 
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.
 
Essentially these graphs tell us that, in the later part of a business cycle, consumers cut back on discretionary purchases to preserve other spending. Until they do, consumer spending does not support any claim that a recession has begun or is even imminent.
 
I updated this graph a few times last year, noting that it looked like it was turning.
 
So, what does it show now?  Here is a 25 year history of the relationship, measured YoY: Her is is, going back 20+ years:
 
 
This measure suggests that we have passed the midpoint of the expansioin.
 
Next, a second consumer jpspending pattern is that, as the cycle wears on, purchases of durable goods decay faster than purchases of nondurable goods.  Well prior to a recession, both are decelerating on a YoY basis, but purchaes of durable goods decelerate more.  Here's what that coomparison looks like noew:
 
Purchases of durable goods are holding up quite well.  It is nondurables (including gasoline) that have declined.  This is not suggesting a recession anytime soon.
 
 
 
 
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