Notes on the Local Economy from Hart Hodges: Inflation, retail and the public sector
Tags:Home Base, Home Depot, K-Mart, public sector, Real Estate Excise Tax, retail sales, Target, The Economist
I recently shared some notes on the local job market that Hart Hodges from WWU’s Center for Economics and Business Research sent me. In addition to the local job market, Hart also had some thoughts on the impact of the economy on several other items, including inflation, retail sales and the public sector.
Here’s Hart:
Inflation? Maybe for some.
Surely we will see inflationary pressures as a result of all the stimulus activity. Right now, however, there is no inflationary pressure from wages and a tremendous amount of productive capacity to keep inflation at bay for a while… or so the reasoning goes.
One thought to keep in mind is we might see inflation-type problems in some sectors – such as higher interest rates on bonds, price increases in health care, etc. – while some sectors (think manufacturing) struggle with the threat of deflation. In other words, the average rate of increase in prices may be tolerable in the future, but the spread around that average could increase and present new policy challenges.
Retail – Cautious consumers could mean a slow, bumpy road to recovery
Household deleveraging means less spending on consumer goods… period. We are going to experience in the coming years a correction of sorts in the retail sector. Articles appeared years ago saying that we’d overbuilt our retail sector. The articles cited Home Depot versus Home Base and K-Mart versus Target to show where contractions might be expected. Now we have consumers adjusting their savings rates as well. These corrections suggest to me a slow and bumpy recovery.
The following graphic (from the San Francisco Federal Reserve) shows the run-up in household debt in the US. The US ratios are compared to those that occurred in Japan in the 80s… with the subsequent “lost decade”. The graph implies that declines in consumer spending in the US (as savings rates get back to normal) will be a drag on the US economy … or at least dampen the recovery.
Public Sector – state governments, Whatcom County hit hard
The public sector is also, I would guess, going to be slow to recover. Less consumer spending means less revenue for governments from retail sales (as well as less from the Real Estate Excise Tax, or REET).
The following graph (taken from a recent issue of The Economist magazine) shows how hard state governments were hit in this recession relative to previous recessions. The decline in state spending matters in our area, where government accounts for approximately 18% of the job base and 20% of the wages.
3rd Qtr Outlook – year-to-year comparisons
… and speaking of retail sales. I’d expect the retail figures for our region to be gloomy again in the third quarter. You may recall that the economy in our area remained active until October 2008. When we look at economic data, we often compare it to the same period a year earlier. For example, we might compare taxable retail sales in the third quarter of this year to the third quarter from last year (to be sure we compare activity in similar seasons).
As such, we may see that retail sales in the third quarter of 2009 were flat compared to the third quarter of 2008. We just need to remember that 2007 was a record year and most of 2008 wasn’t too bad. Sales figures may appear strong in the fourth quarter, because when we compare data from the fourth quarter of 2009 to the fourth quarter of 2008, the point of reference will be lower.
