I was recently asked in a Graduate Macroeconomics class what I would do to gauge overall consumption. For any economist that has taken a Macro class, the answer was easy, and stock: use the GDP Implicit Price Deflator. But I, along with the textbooks, was wrong. After thinking about it, I’d like to change my answer to: Retail Sales.
33% of the labor force is in retail and food service. The Keynesian formula says: Y=C+I+G-NX. Consumption, or aggregate demand is everything in the economy. Using Retail sales to measure demand makes more sense to align the data with the real world.
In macroeconomics, we learn that a little bit of inflation is good, because it shows that there is demand in the economy. However, what if the inflation in the real economy is not coming from actual consumption of goods and services that most people use? For example, this graph shows retail and food service sales in relation with the standard measures of inflation: CPI and PCE.
Retail and food service sales are growing slower than the rate of inflation, which is pretty low all by itself, suggesting that it’s not consumption of everyday stuff that’s driving what little bit of inflation there is. What’s more, Retail sales growth has always outpaced all measures of inflation, showing that retail was a driving force in demand: until the Great Recession.
As long as we’re on the health of aggregate demand as measured by inflation, that’s not doing so well either, at least not according to the totally inadequate standard measures. The Federal Reserve is looking for 1.8% inflation growth to show signs of life in the economy, and it’s not there. Even by the GDP implicit price deflator, considered the more “accurate” measure of consumption, it’s at it’s lowest level in over a decade:
If we’re going to be a retail economy, then it will be the 33% of the retail labor force that will drive demand for retail goods and services. In other words, the people that work at Walmart, Target and the local supermarket are going to give some portion of their paycheck back to Walmart, Target and local supermarket for the goods that they need. Unless of course, they are not making enough money to drive retail sales, which at least appears to be effecting the overall economy.
Adding retail wages to retail inflation could at least get retail inflation to pre-2008 levels again. Having retail sales growth below inflation growth is obviously not normal at this point.