By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
Before we address the question, there were a few disappointing indicators out the past couple of weeks. The monthly employment report showed that the nation added 266,000 jobs. While this would be a very strong number in normal times, it was vastly under the consensus of about 1,000,000 new jobs.
Inflation also came in much higher than expected. Consensus estimates were in the 3% range, but the consumer price index came in at 4.2%, over the year. Producer prices also came in at twice the level expected. One of the negative effects of inflation is the impact on wages, adjusted for inflation. As a result, real wages declined by 3.3% in April. While this is only one month, a decline of that magnitude is staggering. We must go all the way back to 1980 to find a decline that was steeper. Higher prices do not bring about positive feelings for consumers. As a result, consumer sentiment saw a big drop.
Retail sales were also under consensus estimates, but given last month’s strong number, the flat change in retail sales did not necessarily show that the consumer was ready to close their wallets. Compared to last year however, the change is the highest on record, due to so-called “base effects”. Therefore, any indicator in April, compared to last April (during the shutdown), may be inflated. However, when we examine the change in retail sales from June 2020, which is the month when retail sales caught up with the pre-pandemic level, we see the largest increase since the early 90s.
The retail sales numbers are simply mind blowing. No doubt that the several rounds of stimulus is having an impact on consumer spending. As we have documented previously, changes in household incomes and subsequent savings rates are through the roof. March showed the largest monthly increase in personal income since the late 1950s. Not only was it the largest increase, but the change was an earth-shattering amount. March showed personal income increasing by 21%; the previous all time high was a paltry 4.6%! We see similar numbers with the savings rate. The March savings rate was 27.6%, and the previous high was 17.3%, way back in 1975.
This takes us to e-commerce retail sales. One might ask, have online sales increased relative to total sales, especially given the pandemic? Any casual observer might speculate that online sales, relative to total sales have increased. The St. Louis Fed FRED’s database tells us the opposite. Online sales, as a percent to total sales, increased early in the pandemic. From Q1 2020 to Q2 2020, online sales increased from 11.8% of total sales to 16.1%. We saw this increase because many retail outlets were closed. Consumers had no choice but to buy online. Since then, the number has been declining, and the last data point available shows that online sales as a percent of total sales came in at 14% (Q4 2020).
One of the often-cited reasons for the current labor shortage is linked to pandemic-related fears. This appears to be inconsistent with what we might expect to see with online sales. As a percent of total sales, online sales have been declining since 2020 Q2.