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Preparing for Retail

May 14th, 2010 Michael McDonough

On the surface, a recovery in retail sales is not only a harbinger for stronger economic growth, but could prove to be the missing link for job creation (see chart).  Climbing out of the deepest recession since the Great Depression, consumption growth has been surprisingly tepid, at least partially due to companies’ lack of confidence in the current recovery.  This is best demonstrated by surging temporary employment—first in first out employees—while overall hiring is lagging.  While forecasted gains in April’s retail sales, released 8:30 a.m., (+0.2% m/m, +0.4% ex-autos) could help bolster confidence, concerns linger that these improvements may be artificial, fueled by temporary government stimulus, and not be broad based enough to support a genuine recovery.  Both sides of this argument likely have some merit, but I anticipate marginal gains in consumption will continue over the months ahead as consumer confidence strengthens, and as consumer credit levels revert back to their historical norms, after significant deleveraging.

Source: Bloomberg

Thinking quantitatively about this my mind displays Excel’s infamous ‘circular reference’ warning.  People need jobs to consume, and companies need sales to hire.  If companies don’t hire, then people have no income to consume.  While you may be familiar with the adverse feedback loops that helped bring down the market, this is an advantageous feedback loop, where higher sales or faster hiring will support the other factor.  The bottom line is, it will be important to watch whether or not April’s gains are limited to a small subset of sectors, or are more broad-based.  Strong broad based growth will have a much stronger impact on business sentiment, consumption growth’s sustainability, and the likelihood of job creation.

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