Wednesday, November 16, 2011

Retail Sales

One way to revive confidence, in my opinion, is to end support payments for long-term unemployment. That should bring down the unemployment rate. Such government subsidies tend to prolong unemployment by reducing the incentive to find a job. My suspicion is that some of the recipients of such benefits are actually working for cash, and off the books.

This helps to explain why retail sales have been resilient despite high unemployment and weak payroll employment. In any event, the labor market seems to be improving, as evidenced by the four-week moving average of initial unemployment claims, which fell to 400,000 during the week of November 5. That was the lowest reading since the week of April 16. Let’s review that latest data on retail sales:

(1) Retail sales rose 7.2% y/y to a new record high of $4.77 trillion (saar) during October. That puts it 5.1% above the previous cyclical (and record) peak during November 2007. That’s quite impressive considering that sales of motor vehicles and parts are still 12.1% below their 2007 peak.

(2) Also at new record highs during October are the following retail sales categories: Sporting Goods, Hobby, Book & Music Stores ($92bn); Pharmacies & Drug Stores ($231bn); General Merchandise Stores ($637bn); Warehouse Clubs & Super Stores ($396bn in September); Food & Beverage Stores ($627bn); Nonstore Retailers ($403bn including Electronic Shopping & Mail Order Houses); and Miscellaneous Retailers ($124bn).

(3) Industry analysts have been raising their 2012 earnings expectations for the major Retailers since the beginning of this year. The biggest upward revision has been in Department Stores with an increase of 19.5% in the earnings estimate (ytd through the week of November 3). Also up big over this period are Apparel Retail (13.9), Home Improvement Retail (12.3), and Hypermarkets & Super Centers (7.9). The consensus 2012 earnings estimate for General Merchandise Stores has been flat so far this year, while Computer & Electronic Stores is down 3.1%.

By the way, Paul Krugman doesn’t agree with me now, but he did only a couple of years ago. On March 4, 2010, he wrote that it is “bizarre” to worry that unemployment benefits reduce people’s incentives to find jobs. Here’s what he wrote with his coauthor (and wife) on page 210 of their textbook Macroeconomics (2nd ed.), published in 2009: “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of ‘Eurosclerosis,’ the persistent high unemployment that affects a number of European countries.”

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