Weak Sales

The economy has clearly hit a weak patch. Today’s report on retail sales has them falling 0.5% in June. Not only is this much worse than most people had expected – the par expectation seems to have been for growth of around 0.2% – but it means that sales have fallen for three straight months. The last time we had three consecutive declines was in 2008 during the recession.

Obviously this is not a good thing.

The only upbeat aspect of the report is that gasoline sales fell reflecting the recent drop in oil prices. Consumers will benefit from this, but they show no inclination to spend what they save at the pump elsewhere. Very few retail sectors showed any increase, and this that did – clothing, food, liquor, and general internet stores – all made only very slight gains.

Since all three months of the second quarter saw falling retail sales I think it is safe to say that the overall economy weakened from the first quarter’s already weak growth. If the sales figures are reflected in the personal consumption data within the GDP calculation, remember: the relationship is not one-for-one, then they will act a significant drag on growth. Since the first quarter came in at only 1.9%, and rings appear to have slowed down since then, the overall pace will be somewhere in the 1.0% to 1.5% range, depending on how trade holds up, and on how much negative impact comes in from the slowdown in government spending.

The issue then becomes what we can expect for the second half.

At the present pace things are not looking good. There is nothing in the wings with any certainty of turning upthat we can look to as a positive factor. All then risks appear to be on the downside. Our domestic policy possibilities are now highly limited. The election has stalled our already stagnant policy activity. The Fed spoke last week about its concerns, but there are sufficient policy hawks there to stall action until things are much worse. So we are rudderless. Add in the extraordinary self inflicted wounds in Europe and their damage to trade and word business activity, and the range of positives shrinks to negligible proportions.

Given this gloom I think GDP growth of any more than 1.5% is a stretch. This is well below anything that might make a dent on unemployment. Indeed the possibility will emerge, if things stay the way they are, that unemployment could tick up later in the year.

Under normal circumstances such weakness would spell doom for Obama. His weakness in leadership, not so much in action, but in terms of making a strong case for stimulus, ought to bring him down. But Romney represents the past and a continuation of the Reagan/Clinton/Bush obsession with deregulation and market magic. Since it was that obsession that brought us to the crisis, electing Romney would merely postpone the date of recovery by four years. So even with a rotten economy mired in depression it might be that Obama wins re-election. Quite what that means I am not sure. Especially with the strong likelihood of a Republican Congress able to prevent any remedial action being taken.

We are adrift. And we look set to stay that way.

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