Cash poor, time rich US consumers cause retail sales to plateau

US Jobs Oct15a

US retail sales have failed to see the rise that most economists, and the US Federal Reserve, confidently forecast at the beginning of the year.  The theory was that lower oil prices would stimulate discretionary spending, and ensure that the long-promised economic recovery finally arrived.

But September sales were up just 0.1% versus August, and even this small amount was only due to a 1.8% increase in auto sales.   Excluding autos and gasoline, sales were flat versus January:

  • Consumers are now increasingly focused on price and convenience
  • They are “time rich and cash poor”, the opposite of the boom years when they were “cash rich and time poor”
  • Thus Wal-Mart, the US’s largest retailer, has just forecast a 12% fall in profits next year

Wal-mart’s news is confirmation, if confirmation were needed, that the formerly profitable middle ground of value-added products is fast disappearing.  Affordability is the key driver for future success.

So what has gone wrong?

The key issue is policymakers’ refusal to confront the issue of the ageing society, as they worry they will lose votes. They prefer to pretend that low interest rates can somehow restore full employment, and to ignore the structural change in the US population:

  • People no longer mostly die before retirement
  • Instead today, a 65-year old man can expect to live to 84.3 years on average, and a woman to 86.6.

As a result the participation rate in the US jobs market (the percentage of people actually in a job) is in long-term decline.  It peaked at 68.1% in 1997, compared to just 62.3% today:

  • It has been in long-term decline since World War II for men, due to increasing life expectancy –
  • Life expectancy was just 60.8 for men in 1940, meaning that most people could expect to die before retirement.
  • There were only 9m Americans aged 65 or older
  • The rate for women has also fallen back to 56.3% today  from its 60% peak in 1999
  • This has reversed the decades-long increase due to Equal Opportunity movements, which allowed women to stay in the workforce after marriage
  • One likely reason for this is the lack of support for working parents, which has helped to push US participation rate for women below that for Japan.  As the Financial Times notes, “A quarter of all women return to work less than 2 weeks after having a child

US earnings Oct15
The second chart (showing median US earnings in constant dollars of 1982-4), highlights another reason for households now being increasingly “time rich and cash poor”:

  • Average earnings today are actually lower at $337/week than in 2009, when they were $345/week
  • Average earnings for men have fallen from $402/week in 1979 to $373/week today, and are back at 2003 levels
  • Average earnings for women have continued to increase relative to men, but are still at only $305/week today

Clearly therefore, the situation today is quite different from 1985, when oil prices last halved (from around $65/bbl in $2015).  Then, more and more BabyBoomers were entering the workforce and more and more women were working – and earning higher wages.  This created a SuperCycle of demand for the economy, which saw personal consumption expenditure soar 45% in real terms by 1998, according to Census Bureau data.

But now we are set to see the reverse of this process, as the Bureau of Labor Statistics has noted:

“Slower GDP growth (will) become the “new normal.” In addition to the recession’s impact on potential growth, the economy faces a number of hurdles. As the nation’s demographic shift continues, with the baby-boom generation moving into retirement, the labor force participation rate will continue to decline, moderating growth.”

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