|View From a Height
Commentary from the Mile High City
Wednesday, July 14, 2004
The Commerce Department reported that retail sales dropped 1.1% in June. No doubt the Paul Krugmans of the world will use this as an indication that the economy has topped out, and that it's 1937 again.
Before we hit the panic button and all start buying gold to stuff under our mattresses, let's look at three things: a little history, the stock market, and inventories.
First, the market. When this news broke, the market barely moved, and the Dow is currently up 17 points. This indicates that the market had already priced in this information. When the market doesn't go down on bad information, that's frequently a sign that it's headed upwards. Since the Dow is well up from its lows of the year, this is a very good sign. The market is also an excellent leading indicator of economic activity. Its dip earlier in the year probably predicted this pause, and its rise since then probably indicates robust growth will resume.
This is exactly the same sort of pattern we saw in 1984, following similarly strong consecutive quarters. The St. Louis Fed doesn't have actual retail sales information from that far back, but it does have Personal Consumption Expenditures, which is close. Indeed, in February 1984, personal consumption dropped 1.4% (in 2000 dollars) in one month, before resuming its upward climb.
Finally, the thing people care most about: will this lead to layoffs? Probably not. The inventory/sales ratio actually went down, indicating that businesses are not finding themselves backlogged. This number has been trending downwards since the Fed first started tracking it, in 1992. It's currently at an all-time low, so it's unlikely that manufacturers will be laying people off. In fact, improved inventory management is being increasingly credited for longer periods of growth and shorter recessions. Rhetoric aside, the last two recessions have been painful mostly by comparison with their surrounding prosperity.
All of this suggests that we're not about to enter another recession, and that we can probably count on a strong economy for the last half of the year.