Thursday, June 19, 2008

Consumer activity growing?

In my last 2 posts I have been rather self-satisfied about predicting the economy correctly. However, today I found a report in the Times suggesting that retail sales for May were at a 22 year high. How can I square this with the predictions of consumer downturn?

It would be foolish to entirely discount such a report. However, the figures do seem to be in contrast to the reports of the major retailers, who have been reporting poor trading conditions. As such, it seems that the best approach to this news is to 'wait and see'. In other words, is it a statistical blip, or a flawed measure?

I am rather self-conscious that this is a case of selecting/believing the figures that support my own case, but believe that this is justified. Aside from the reporting by retailers of a downturn in trading , there is also the problem of exactly where consumers are finding the money to go spending. One of the points of agreement amongst nearly all economists is that a combination of food/fuel price inflation and tax increases have left consumers with less disposable income for shopping. Furthermore, credit has become less available, so it will be harder for consumers to borrow to shop.

There is one rather frightening explanation which may also explain the increase in spending. It is also possible that what is being seen is not an increase in the amount of goods being sold, but a rise in spending due to inflation. In other words consumers are not buying anything more, but are having to spend significantly more just to stand still. Of particular note is that spending on food rose sharply, and the increase in food prices has been well documented.

If this scenario is correct, then the problem becomes one of how sustainable such spending will be. Perhaps this is the last gasp of consumer spending. As I mentioned earlier, this seems to be a case of 'wait and see'.

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