Retail Data Put Double-Dip Back on the Table:

Hey, Big Spender...

by Irwin Kellner - Wednesday, June 16, 2010

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Commentary: Retail data put double-dip recession back on table

Where are the big spenders, now that we really need them?

The unexpected decline in May's retail sales has many economists questioning the strength and durability of the nascent recovery.

This was the first month-to-month retreat for retail sales since last autumn. What is more, it was pretty much across the board — even if you exclude autos.

On the surface, this seems at odds with consumers' attitudes. The latest survey of consumer sentiment shows a better-than-expected gain.

However, by historical comparisons, consumer moods are still fairly dour. And at any rate, these consumer surveys are not a good predictor of how much people actually spend. Rather, they mainly tell us how people felt on the day that they were queried by the pollsters.

Cheerful or not, consumers are increasingly reluctant to open their wallets. They are making fewer trips to malls and shopping centers, and when they do buy, they are buying mainly necessities — not discretionary, big-ticket, or luxury goods.

They tend to frequent big-box stores and other discount outlets — and only when these merchants run big sales.

This hunkering down extends to consumers in all income brackets.

Lower- and middle-income families are worried about jobs, their mortgage, and the rising cost of food and health care. The rich are less worried about jobs, but they have taken a beating in the stock market, second homes, art and other investments.

There's less eating out than there used to be. The only restaurants that seem to be doing well are fast-food stores and new, trendy upscale establishments.

Since retail sales make up over half of all consumer spending, it is safe to say that at least one-third of the gross domestic product is now falling. It is also not a stretch to conclude that the rest of consumer spending, which is services, is soft as well.

Add to this the ongoing weakness in housing sales and new home construction, the slowing in exports as the dollar rises in world financial markets and the sharp cutbacks by states and local government, and most of the economy — except for inventories — appears to have stopped growing and may well be contracting.

In plain English, double-dip is back on the table.

Yet, policy makers have increasingly begun to discuss the need for both fiscal and monetary policies to tighten up.

Now I am as concerned as anyone else about the size of Washington's budget deficit, as well as the amount of liquidity that the Federal Reserve has injected into the financial system.

That said, now is not the time for policy to tighten. Rather we should make better use of the ease we already have.

Since we learned from the experience of the 1930s that fiscal policy is a more effective tool to support the economy than monetary policy, the administration should redirect the remaining funds from last year's stimulus program to where it will do the most good — creating jobs.

This is not as easy as it sounds, since businesses' reluctance to add to staff traces to more than the murky economic outlook.

It is also due such issues as health care, energy, climate control, regulations and tax increases — uncertainties created by the administration itself.

Irwin Kellner is MarketWatch's chief economist.

http://finance.yahoo.com/banking-budgeting/article/109816/hey-big-spender?mod=bb-budgeting&sec=topStories&pos=8&asset=&ccode=