The September retail sales shocker
Remember how people used to say, “This isn’t your grandpa’s recession”? Well this isn’t even your slightly older brother’s recession.
The government just announced that retail sales surged 1.9% in September, way above expectations. In a normal year, that would be 6-months worth of growth.
Some will argue that when rebounding from a deep slump it’s levels that matter, not growth rates. And to some extent that’s true. But retail sales had already fully recovered by August, so this figure pushes us well above trend.
It’s almost impossible to overstate the weirdness of this recession. In a normal recession, retail sales plunge sharply and take years to fully recover. Look at the Great Recession, for instance. This time around sales fully recovered in just 4 months, and just 5 months from the April trough sales are already above trend:
And yet despite the surge in retail sales, the overall economy remains deeply depressed. RGDP is down sharply, and total employment is down by roughly 10 million. What gives?
Obviously, this is not a normal demand-side recession. That’s why the fiscal cliff at the end of July did not affect retail sales. The economy is being held back by Covid-19, not a lack of disposable income. Covid is obviously a problem in the service sector, but more surprisingly is also a problem in manufacturing. But how could manufacturing remain deeply depressed while retail sales booms? Who builds the stuff being sold in stores?
American manufacturing is increasingly focused on investment, not consumer goods sold in stores (many of which are imported.). The slump in travel affects everything from fracking to aircraft manufacturing to hotel/restaurant construction. With less investment, there is less manufacturing of inputs used in investment, like oil pipelines for frackers. We’ve seen other manufacturing mini-slumps when oil prices tanked, even when the broader economy was OK.
We don’t need fiscal stimulus. We do need a fiscal relief package to help the many people who are being hurt by Covid-19. The difference between fiscal “stimulus” and a fiscal relief package is that the latter would not include $1200 checks to middle class Americans with jobs.
PS. This post is not a forecast. Hospitalizations are now entering a third wave, and this may slow the economy. I cannot predict Covid and thus I cannot predict the economy. I’m also not denying that demand still has some effect, even in a supply-side recession. Nor am I denying that it would be better to have a more expansionary monetary policy, expansionary enough to raise inflation expectations up to 2%. That’s all true. Nonetheless, this recession could end quickly if we get a widely available vaccine or a cure. It’s mostly supply-side, which means it’s nothing like 2009.
Tags:
16. October 2020 at 09:37
Shorter Scott Sumner on this post: “I don’t know why the economy has rebounded, fiscal measures not needed, and dammit Trump will get credit for this V-shaped rebound, exactly as he predicted in yesterday’s debate”. MAGA!
16. October 2020 at 10:08
I do not follow the details closely and when I do I understand maybe half of them in a good week. But haven’t we passed an enormous amount of income replacement bills? “FRED” tells us that in the 2 quarter (April) of this year, Current spending increased by 80% to 9.1 Trillion—all of it borrowed at about 1-2%. I cannot find the June numbers—–but we have this 1.8 trillion proposal hanging out there which Trump keeps threatening to increase if Pelosi doesn’t give in soon :-).
16. October 2020 at 10:12
Excellent analysis. The only thing I will add is in the very fast growing red state city the people that have been keeping everyone fed in fast food and grocery stores are overwhelmingly African American…and Biden made this point a few days ago. So once again, that is why paying reparations to descendants of American slaves just so happens to be an economic no-brainer at this point in history. I have depended on essential workers to help keep my family fed and healthy while they risk their health to help everyone out…and it’s not like we haven’t been throwing money at groups in the last several years like coal miners and UAW and farmers. And the budget deficit is out of control as it is so another trillion of very good stimulus isn’t going to hurt anything and in fact will help things by turbocharging the recovery.
16. October 2020 at 10:24
You really are funny. When Trump says he thinks “next year” i.e starting around january he expects the recession to end quickly he sounds like you— (because he believes we will open up more, we will get some vaccine /curatives and people may actually be allowed to work) he sounds like a guy who has been in business through many many cycles. We can test your turtle versus commie theory if and when Biden wins. Counterfactuals of course leave us guessing—but if Biden wins I don’t believe you think that will be good. It makes no sense to me you think it would not be horrendous. Your disgust at Trump and belief he is just a turtle is a wild guess.
16. October 2020 at 13:12
“The economy is being held back by Covid-19, not a lack of disposable income.”
This seems like a false dichotomy. There can be lack of demand for either consumption or investment even with plenty of disposable income in the hands of some people. Covie-19 impacts both supply and demand. My guess is that right now if not from the very beginning the effect on demand (firms not investing, consumers not having completely shifted from “risky” consumption to “safe” consumption) is much more than on supply (firms not able to find enough healthy.
workers make everything they can sell or not able to purchase key inputs.)
If this is true, it means that the Fed would not have to push price level trajectory expectations very much above 2% p.a. to keep NGDP growing on target.
16. October 2020 at 16:16
We may not understand the macroeconomy due to Covid-19.
At least now we have an excuse.
I wonder if retail sales are higher due to restaurant and bar sales. Those sales were in cash and were under-recorded. I never knew a small business operator who recorded cash sales in full.
Sales of food, drink and goo-gaws at retail stores are recorded.
I wonder if airline sales are counted as “retail” or “transportation”?
If I don’t spend $3,000 on airline tickets this year, maybe I buy a cashmere coat for my mistress.
16. October 2020 at 16:26
https://marginalrevolution.com/marginalrevolution/2020/10/new-results-on-the-chinese-vaccine.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29
Tyler links to China vaccine.
I guess it is okay to refer to a “China vaccine” but not a “China virus.”
Anyway, seems to work.
16. October 2020 at 18:49
Michael, My TDS reflects the fact that I’m biased. I think he’s the second worst person, after Hitler. The people who have actually worked for him know better:
https://www.thedailybeast.com/trumps-former-chief-of-staff-john-kelly-calls-him-most-flawed-person-ever
Thomas, If people are afraid to buy services like travel then that’s a supply problem. You can fix that with demand stimulus. I did a post on that earlier.
17. October 2020 at 05:20
Scott, I would very much like to read your response to the interview with Eugene Fama Tyler Cowen cites where Fama compares the Fed to pornography (!). Many thanks for your work.
17. October 2020 at 06:11
Scott,
I’d be interested in your reaction to Fama’s views on monetary policy:
https://themarket.ch/english/inflation-is-totally-out-of-the-control-of-central-banks-ld.2476
He denies the existence of real effects.
17. October 2020 at 06:15
I don’t think the situation is that inexplicable. A lot of economic actors still have plenty of cash and a favorable medium term outlook (ie, positive NGDP forecast). And they are heavily constrained on spending in certain areas. But retail there are essentially no restrictions, so there is a lot of spending in this area now. Same with residential real estate, especially in the suburbs. The specific timing is hard to understand, but this is normal. We can understand broad market trends without being able to perfectly ‘time’ the market.
The difference with 2008 is that there was a broad lack of demand and no funneling of consumption into particular sectors, so there was a broad reduction in consumption. And because there was a general sense of being in a pretty bad traditional recession, there was a broad shift to a preference for conservative asset positions and increased savings at exactly the moment when neither were possible. Essentially, NGDP expectations turned down or negative. This is a clear situation where monetary intervention can help.
17. October 2020 at 06:23
I am sure Trump drives people crazy——When he was just Mr Real Estate on the cover of the NY papers, it never occurred to me he was not a clown—-although I had no opinion on his business acumen——except the last thing the Banks wanted was to own all that crap—-and were persuaded he was the best shot——because the next highest “bid” was likely pretty bad.
When he ran for president, of course I thought it was a joke—-and he did not persuade me in the least. My wife and I would watch the GOP debates and we could not understand why people thought he always “won”. . I never “hated” him however. Hillary? Well, she may not have been as good as the mediocre and disappointing Obama ——but she was pretty easy to dislike—like Trump is.
From a morals perspective I thought of him like Clinton. Back in the early 80’s the Investment Bank I was with did some corporate finance work for him. One of my best friends (PHD Finance!) was a junior associate and he did work for Trump. I have asked him recently what it was like to work with him.
He said he was like all these clients we thought were dopes (the era of giant corporate buyouts—-I remember the Chairman of Pan Am having us do analysis on them buying Manufacturers Hanover—so dopes is not really that arrogant a statement)—-and Trump insisted my friend stay on the account.
The problem was he said “make sure that little “n-word” stays on the account. I only learned this last year. So on the one hand he wanted this smart guy—-on the other hand he was a little …………….
I was a member of the Bedminster Golf Club (I actually like, but do not love, golf——I was okay—-but it destroyed my back—-and gave up playing 10 years ago) that Trump owns and goes to. I obviously talked to him several times usually about golf and the club. But I was not even aware he had that TV show——I stopped watching TV shows in the 70s—-although I am a Netflix/Amazon guy. He was actually what people would call a “good guy”. Very polite and friendly. Although, I met Bernie Madoff a few times —-he was also polite and friendly. But I also know lots of nice and friendly people who are okay!
He loved that club—was there all the time—-but he acted like any normal member (early 2000s).
So, his use of that racial term was bad. I was lucky to have been raised properly. But, circa 1980 Wall Street was very stereotypical and while we hired many brilliant people of different races, it was still creepy in that way.
By the 90s they kind of got their social act together—-now they have gone too far. But I have heard many pols, (one a former Dem Gov of NJ) and elite types (wish I were an elite type) use such language—-particularly in the 80’s but later too.
I understand bias—-I am clearly biased—-politically etc. I have a very —-what is the right word—-perhaps a wariness toward humanity——I am definitely not full out cynic but I don’t trust many of those who run our institutions. Like you, I see myself as a libertarian. I am from the John Stuart Mill school. Ironically, after 5 years in a PHD program, it was my view of him as an obvious bore that was partly my reason for leaving. (Yes, definitely paradoxical—-long story)
Similarly, I also found the Federalist papers and the Constitutional writers boring——and tended toward reading what I now call the weirdos who always were trying to reinvent reality —from Rousseau to Marx to Nietzsche, Russell, the atheist existentialists, to the postmodernists and many more.
But in the end, the founders were genius. They knew mankind was capable of the worst atrocities—-and they did not exclude themselves—-and they literally were chucking dice to try to create a system where evil could be limited. Limited, not eliminated ——that would be “cure worse than disease”.
I also am fascinated with the 20th century transformation. I have also read more books on Hitler than is healthy——but I needed to—-as a child I had many nightmares about him—-too many elders in my family were in WW2——I think I understand Hitler. He was not the Demon High Lord of the Riefenstahl/Goebbels movies we can watch endlessly on Netflix. He was a really bad human being —-evil in his actions and stupid beyond belief——but he understood persuasion until drugs got the better of him.
Like all the non-“great man” historians, I believe he was merely the “right man for his time”—-and of course I mean that in the worst possible way—-the Nazis really were the worst—-although Mao was pretty close, while Stalin was almost pedestrian, itself terrifying. Mass murder is grotesque, but the “reasons” can often be more grotesque.
So this is just a story of sorts——-but it’s message is ———it is literally absurd, a-historical, ignorant and just plain foolish to compare Trump to Hitler. Maybe even dangerous—-as it makes me think you do not really understand humanity or history.
The fact is I don’t believe you think that—-it feels like a troll or just an emotion of the immediate. This is not even remotely a pro Trump statement. You just hate the guy—which I think is perfectly fine—not like you need me to give you permission. But it is the comparison that concerns me ——-it is as if you know nothing—-when I think you have extraordinary intellectual ability.
Meanwhile, we have the literal anti-founders trying to head down a road which truly sucks —-but I am not ready to go full commie on them yet——but I watch with a very wary eye. You do too—-
Of course, this is your bad blog—-so to paraphrase Dostoyevsky—-“all is permitted”.
17. October 2020 at 07:18
The pandemic is a per-capita kinda thing:
https://fred.stlouisfed.org/graph/?g=wNZp
17. October 2020 at 10:13
Michael, If you write long comments, I won’t read them.
17. October 2020 at 13:39
“Thomas, If people are afraid to buy services like travel then that’s a supply problem. You can fix that with demand stimulus. I did a post on that earlier.”
If people are afraid to buy air travel and try instead to buy steaks but the meat packing plants are closed because their workers are sick, that’s a supply problem. If they don’t try to buy something else and just leave the money in the bank and banks don’t lend it for the purchase of capital goods or some other kind of investment, that’s a demand problem. The first cannot be fixed (real income cannot be maintained) by keeping expected and actual NGDP growing at the pre crisis rate. The second can; the relative price of investment goods and services will rise to draw resources into their production, but real output and income will increase.
Or is there something wrong with this analysis?
17. October 2020 at 18:58
Thomas, There’s a reallocation problem in quickly switching resources from one sector to another. It doesn’t happen overnight, and that’s a supply problem, even if caused by demand moving from one sector to another.
Interestingly, many people wrongly blamed the Great Recession on reallocation out of housing construction. But that was a much smaller reallocation problem, over a much longer period of time.
17. October 2020 at 19:24
Scott—-was not aware that you had such a rule. Will keep that in mind. Short is better than long, I agree. Not all the time, but most of the time.
18. October 2020 at 04:34
Short version of long essay
In my likely too long essay (I ignore the fact many write multiple Essays, me included, that are as long as my one essay—-but that is different in concept—-so I accept your point), I tried to give a “story” of why I view your opinion on `Hitler Trump self evidently misguided.Now I will just give conclusion
It is literally a-historical, absurd, ignorant, and just plain foolish to compare Trump to Hitler. So someone who says he believes this (I know so many who hate Trump, but know Hitler e is a step too far) is more —I assume he/she are trolling or lost in an immediate emotion and just wants to say it because it reflects a hate he needs to express.
This is not a pro Trump,statement. I think it is dangerous (mildly) because it is as if you have no understanding of history or humanity and by promoting that idea might persuade the minority of your readers who are clueless. The comparison is what is just so off.——it,is,as if you know nothing.
So I conclude it is the only thing you can say which fully fulfills your emotional need——plus, of course, you love the troll element—-you love people like me disagreeing as it seemingly annoys them.
I am not annoyed—-in the usual way people get annoyed.——I just want you to know I know you don’t believe it. And if you REALLY do believe it, then truly that is moronic—-but you don’t.
18. October 2020 at 09:16
Michael, How does your comment relate to September retail sales?
You said:
“It is literally a-historical, absurd, ignorant, and just plain foolish to compare Trump to Hitler.”
You don’t think it’s accurate to say that both are white men?
Or by “compare” do you mean “claim to be identical”? Who does that?
20. October 2020 at 06:30
September is included in the 3rd qtr. of the BEA’s figures for GDP. It’s not: “RGDP is down sharply, and total employment is down by roughly 10 million. What gives?”
The latest estimate of Atlanta’s GDPNow: up 35.2 percent — October 16, 2020
20. October 2020 at 06:32
The FOMC’s Covid-19 response shows that there is a “sweet spot”. Contrary to Friedmanites, the distributed lag effect of money flows, the proxy for real output, has been a mathematical constant for over 100 years.
In other words, N-gDp targeting does have a “sweet spot”, a closing of the output gap, where an injection of new money is predictable and robust (not neutral or harmful).
26. October 2020 at 17:59
Michael, I liked your long comments here.
Btw, if you want to compare Trump to anyone, Berlusconi is the obvious candidate, I guess? Scott’s point about the US turning into a banana republic suggests that Latin America might have plenty of comparison material (but I don’t know about that to suggest names.)