October Retail Sales Rise Slightly. Recession Coming?
By podcasts@redstate.com (Redstate Network) on Economy
Retail sales (what consumers spend in the grocery, at Wal-Mart, on Amazon, and elsewhere) increased by 0.2% in October, according to the Commerce Department. This number is in line with analyst expectations, and it reflects an outlook for the American economy that is slightly better than expected.
Market reaction is likely to be positive overall. The dollar is stronger against the yen and holding at low levels against the euro this morning. Let's pick apart a few of the details.
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The question in everyone's mind is: will we have a recession?
Most analysts expect that the reduced value of people's homes (after the collapse of the real-estate bubble) will cause them to spend more cautiously. In other words, they're expecting a recession led by lower demand.
I've never quite bought this theory, and I'm not too surprised by the government's non-disastrous readings from October (retail sales ok, job growth better than expected, consumer sentiment lower but not terribly so, commodity prices moderating).
If anything, we're likely to get muted consumer activity because mortgage refinancings have dropped to near zero. This is not normal in a time of declining interest rates (the 10-year US Treasury note is now trading to yield around 4.30%). But even people with sterling credit are finding that the refinancing window has slammed shut due to risk aversion by traditional lenders. (The non-traditional lenders that fueled the bubble are essentially out of the business.)
My concern about business growth comes from the supply side. I've been very worried that global investors will dial down their risk tolerance in the wake of this year's disorders in the financial system (which are closely related to, but different from, the collapse in US housing values). That would lead to reduced credit formation and, some time later, reduced business activity.
If I'm right about that, then you would expect to see sharp inflation as we come out of whatever economic softness we experience in the next few months, and quite likely a quick reversal of the Federal Reserve's monetary easing. That in turn would create a big-time dollar rally, all else equal.
What wouldn't be equal? Economic conditions in Europe, which now look to be slowing rather sharply. Europe's economies are considerably more export-driven than ours is. If this trend holds up, it will mute the pressure for the euro to appreciate against the dollar.
The role of oil prices is very, very interesting. Oil is now about 10% down from its intraday peak over $98 a barrel, reached last week. Gold is also down below $800 an ounce. I stand by my theory, expressed in several RS posts, that the commodity strength was a technical reaction to lower US interest rates rather than market fundamentals.
One confirmation of that, is that prices for downstream products (gasoline and distillates) have not spiked nearly as much as crude prices. That may be signalling a slowdown in demand in response to the higher crude price. The next few weeks will tell us, so watch prices for gasoline and heating oil.
Additionally, if the economic stats continue to show resilience, the pressure will come off the Federal Reserve to reduce interest rates again when it meets in December. If the markets decide that the Fed will stop cutting rates, expect a dollar rally.
As has been the typical pattern in recent years (since the Federal Reserve more or less got its act together), any recession we experience will be short and shallow, and will probably be over before it even shows up in the stats.
Keep this in mind next summer when Hillary Clinton is screaming that we need a big dose of higher taxes and new Federal spending to improve economic conditions that she will characterize as worse than the Great Depression. |
