Wednesday, January 20, 2016

Cheap Oil Isn't Helping Our Economy

All through 2015, gasoline prices fell.  Many economists wrongly predicted that this would stimulate the economy with stronger retail sales.  Yet, when it was all said and done, 2015's consumer activity was the worst since 2009, when sales were at a negative growth rate as this chart from shows:

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Overall, total retail sales came in at just 2.1% for 2015.  Less than half that when auto sales are excluded.  What's worse, retail sales in December actually fell one-tenth of a percent in a month that most retail expected strong Christmas sales.

But, this data comes on the heels of another piece of worrisome data: the Consumer Price Index (CPI). Like retail sales, saw its lowest growth in prices in years.  This time since 2008. Note this chart from

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The reason that these two charts are so important is that they both show a serious slowing of consumer activity which may result in a recession in 2016.  The reason being that 70% of our growth is a direct result of consumer spending.  For example, in 2014, our economy was calculated to be $17.4 trillion dollars.  Consumer spending was responsible for $11.9 trillion dollars.  So, any significant slow down in that area would result in negative growth; and, two consecutive quarters of it are the classic definition of a recession.

So, the slowing in retail sales is obviously a problem.  But, the slow down in the CPI inflation is less obvious but an equally serious problem. A healthy economy should see CPI inflation between 2 and 3% per year.  That indicates that wages are increasing; a confidence in the economy and the job market; when retailers feel like the can raise prices without losing business.  But, we haven't seen that kind of growth in the CPI since 2011.  Simply, the year-by-year fall in any CPI inflation shows that there are pricing restraints.  In other words, people are buying enough to convince retailers to increases prices.  To economists, this is called disinflation.  And, should the growth in the CPI go negative in the coming months, that would be called "deflation".  That is serious and that would also show a contraction.  Possibly, a recession.

Thus, when I hear certain politicians and economists claim strength in the economy, I look at these two charts and think not.  To me, these charts are like two canaries in a coal mine; signalling economic disaster in the not too distant future.  Despite falling gasoline prices, the consumer has decided to save and not spend; indicating a certain amount of fear and uncertainty.


Retail Sales in U.S. Decrease to End Weakest Year Since 2009:

Current US Inflation Rates: 2005-2015:

What Are the Components of GDP? Explanation, Formula and Chart:


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