Steady Gains in Retail Sales Hint at Broader Growth

By Covering Business     October 19, 2012

By Sameepa Shetty
Columbia Journalism School C’13

If the economic recovery is in doubt, no one seems to have told the US consumer.

Consumers spent a record $413 billion at retail and food service outlets in September, up from $320 billion a year ago, the Census Bureau said Monday. That release marked the 35th straight month of year-over-year gains in retail spending.

Improving retail sales are a positive sign for the economy because consumer spending accounts for the majority of economic growth. Through September, retail spending has grown by more than 5% over last year, outpacing the most basic measure of economic growth: the gross domestic product.

The recent gains in retail sales have been driven by a variety of factors, including rising consumer confidence, personal income growth, an improving labor market and inflation.

By at least one measure, Americans feel more comfortable spending money today than they have at point in the last five years. The University of Michigan’s consumer sentiment index rose in October to 83.1, its highest point since the onset of the financial crisis.

Consumers also simply have more to spend. Personal income has increased in each of the last seven months, albeit at a modest rate.  Real disposable income – a measure that adjusts for inflation and taxes – has grown consistently since November.

A rosier labor market has also contributed to the rise in retail sales. The unemployment rate has been falling fairly consistently since hitting its recession-era peak of 10% in October 2009. In September, the jobless rate fell to 7.8%, its lowest point in 44 months.

Some economists question the validity of the recent jump in retail sales because rising prices may be obscuring true sales trends. The consumer price index reached a three-year high in September and has climbed consistently on a month-to-month basis since March. Those gains have been driven largely by rising fuel costs.

Even if the recent gains in retail sales are representative of a true change in spending habits, they may not be enough to spur significant economic growth on their own, says Mickey Levy, the chief economist at Bank of America. He notes that although consumption accounts for more than 70% of GDP, retail sales make up only about half of that; the remainder comes from spending on services. “People have changed the way they are spending money,” he says. “While they are spending on goods, especially durable goods, there is no demand for services.”


This article was written for the Columbia Journalism School’s seminar on business journalism in the fall of 2012.

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