Over at Econbrowser, James Hamilton points out that some of the recent fretting about the economy is misplaced. The gloom is apparently about the modest rise in retail sales.
WASHINGTON Sep 14, 2006 (AP)— Retail sales posted only a modest gain in August as worried consumers got hit anew with sticker-shock at the gasoline pumps.
The nation’s retailers recorded a tiny 0.2 percent increase following a much bigger 1.4 percent rise in July. It was the weakest performance since sales had actually fallen by 0.5 percent in June.
But Prof. Hamilton charts retail sales for 2004, 2005 and 2006 both seasonally unadjusted and adjusted. First up is the data without seasonal adjustments. Note that while the retail sales increase is small retail sales over all are at their highest in 2006 on a month-by-month comparison. Further, as Prof. Hamilton notes, the downward trend from earlier in the summer seems to over.
Adjusting for seasonal factors we get this chart,
Again we see that 2006 is better than the previous years on a month-by-month comparison. As Prof. Hamilton notes, “If this is the worst we’ve got, we’re in pretty good shape.”
However, Prof. Hamilton points to something that could be a sign of concern. Tax receipts seem to be dropping off when looked at on a monthly basis,
If the economy is cooling down and overall economic activity is on a decline, then one would expect tax receipts to also decline. Thus, this could be the first signs of a slowdown in the economy. However, as Prof. Hamilton rightly notes, this series is rather noisy so it is hard to tell if this drop is significant or not. The most recent couple of months aren’t all that dissimilar from October and November of 2005.
Basically, there is little reason to be overly worried about the economy. While a cautious outlook might be wise, being downbeat strikes me as just being overly pessimistic.
Update: Well, Ed Leamer, a respected economist, has a more pessimistic view.
Housing Bubble to Deflate; Recession to Follow
That [headline is] the prognostication of economist Ed Leamer:
In Leamer’s view, the housing market appears to have peaked “in California and elsewhere. It will take more than a year for this weakness to turn into job losses and to affect the economy in general.” [emphasis added]
And, yes, he’s using the “R” word. As in “recession.”
Leamer lays the blame squarely on the Federal Reserve for leaving interest rates too low for too long. Now, he says, we’re not only heading for trouble in the housing sector, but in the auto industry — another market that got drunk on historically low rates.
Low borrowing costs accelerated future sales by enticing consumers to trade up to bigger homes and new vehicles sooner than they might have done otherwise. Instead of waiting to buy a new family car in a couple of years, folks said, “Oh, what the heck. Financing is so cheap we might as well get it today.” As a result, car dealers lose the sale they would have gotten two years from now.
As rates creep higher, consumers happily driving their new cars or living in their larger homes have no motivation to purchase additional ones. Since consumer spending drives two-thirds of our economy, when consumers close their wallets, the impact is far-reaching.
Well, with this new information, everybody update your priors. And while you’re at it include the information from Barry Ritzholtz.
Another Update: Here is some more of Ed Leamer’s views on recessions and the economy.
If you ask Ed Leamer at the UCLA Anderson Forecast what nine out of 10 recessions look like in their early stages, he’ll tell you straight out: A decline in housing transactions.
So, this week’s LA Business Journal headline “Offices Shutting Down as Home Sales Plunge,” is at least a bit disquieting, though hardly unexpected.
The scenario set out is pretty much in line with what Leamer has said has always led to recession: transactions are falling off. Real estate agents are being put out of work along with their brethren in the mortgage brokering, construction and remodeling businesses. They will spend less. That’s less for housing and less for other durables. The impacts will multiply through the economy as those two largest sectors slow down.
And this article as well.
“This soft-landing scenario is a fantasy,” says Ed Leamer, director of the UCLA Anderson Forecast.
While he doesn’t expect a recession in the next year, he predicts the housing slowdown will be nastier than the Fed projects, hurting consumer spending, jobs and growth. “Anything housing-related is going to feel like a recession, almost like a depression.”
