Friday, December 12, 2008

Retail Sales Disappoint, U.S. GDP To Drop Significantly

The pattern of gloomy economic reports keep coming, and this isn't going to be any different. Retail sales were down sharply in October, and are expected to take another big hit when the November numbers are released as well. With all the economic problems going on right now some economists are predicting huge hits to the U.S. GDP in Q4 of this year, and well into next. As this recession continues it is becoming clear that we could be in for the worst economic slide since the great depression. Although most experts won't dare say that this recession will be worse, or even close to as bad as the great depression, however, who knows how that outlook might change come next year if things don't improve. Kathy Lien investigates the retail sales numbers, and talks a bit about America's growth prospects in her blog post below.

The two biggest inputs into GDP are consumer spending and trade. Therefore the 2.8 percent decline in retail sales and the surprise widening of the trade deficit in the month of October suggests that GDP growth could take a big dive in the fourth quarter.

Word on the street is that some economists are calling for GDP to decline as much as 4 to 6 percent in Q4, which would be the largest contraction in growth since the 1980s. In the first quarter of 1982, GDP fell -6.4 percent. A 4 to 6 percent drop in GDP would not be out of the ordinary given the current conditions in the US economy. In the fourth quarter of 1990, GDP contracted by 3 percent and in the first quarter of 1991, it contracted by 2 percent.

If you agree that the current recession is worse than the one in the 1990s, then it would be logical to expect a contraction in growth exceeding 3 percent.

Don’t Expect Retail Sales and Producer Prices to Help

Retail sales and producer prices for the month of November are due for release tomorrow. Another large decline in consumer spending will only support our thesis that GDP will see a big contraction in the fourth quarter. All of the leading indicators for retail sales that we follow point to very weak consumer spending last month despite stronger Black Friday sales. SpendingPulse, the retail data service of MasterCard Inc. reported that retail sales excluding autos dropped by the largest amount in 5 years. Chain store sales as measured by the International Council of Shopping Centers also dropped by 2.7 percent last month, the largest decline in at least 8 years. Don’t forget that November was also the month that non-farm payrolls fell 533k. Americans were more worried about keeping their jobs last month than spending liberally.

The Treasury market is already pricing in the possibility of deflation and depression with yields in zero to negative territory for the first time since the Great Depression. Although we don’t think that the US will fall into a depression, the data certainly supports tougher times ahead for the US economy.

This article has been reposted from KathyLien.com. The full post can also be viewed on KathyLien.com.

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