A Temporary Lift for Retail Sales

Don’t expect the brisk August pace of retail sales to continue. The cash for clunkers program not only pumped up auto sales but also gave consumers’ spirits a lift, inspiring them to spend a bit more on other goods as well. But that freshening breeze will be short-lived—the federal tax credit for car purchases has ended.

Meanwhile, the chilling effect of rising unemployment will continue into early 2010 and constrain spending during the high-stakes holiday season. Retailers typically ring up from 25% to 40% of their total sales during the last three months of the year. This year, they’ll see holiday spending about even with last year. That’s not saying much: Holiday spending in 2008 was dismal, with sales dropping 3% from 2007 levels—the first holiday period decline in decades.

“We’re in the trough right now,” says Leon Nicholas, director of retail insights at Management Ventures Inc., a retail consulting firm. The sales level is “like a pebble going along the bottom of a seabed—it pops up a little bit because a little current will get it or a breeze will go by.” Cash for clunkers pushed the pebble up in August, pumping $300 billion into car sales during the summer. That drove vehicle sales to an annualized pace of 14 million in August, compared with a pre-clunker pace of fewer than 10 million.

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It’s likely, though, that some of the summer sales were siphoned from future sales, making it tricky to assess the final impact of August sales. Odds are the auto incentive will result in a third-quarter increase in consumer spending of 2.5%, following a contraction of 1% in the second quarter. Come fourth quarter, with no clunker driven car sales, consumer spending is likely to increase only about 1%.

Overall retail sales rose a robust 2.7% in August, following a dip of 0.2% in July and small increases in May (0.5%) and June (0.9%). In addition to cars, electronics, clothing, sporting goods and general merchandise sales went up in August. Sales of furniture and building materials were down.

The retail sales report doesn’t include purchases of services, which make up about 55% of total consumer spending. Nevertheless, the retail sales figure can indicate the direction of spending trends as it includes discretionary spending—on both high priced items such as cars and appliances and lower priced products such as apparel, toys, electronics, sporting goods and meals consumed at restaurants. For most of this year, spending in those categories posted monthly declines. Moreover, the latest Federal Reserve Board report on economic conditions around the country—compiled in August and early September—notes that although back-to-school sales bumped up spending, “shoppers remain focused on essentials and continue to refrain from purchasing discretionary and big-ticket items,” with the exception of cars.

Still, there’s no doubt the uptick in August is good news for the economy. Lyle Gramley, former Federal Reserve Board governor, says, “Consumers are feeling more confident. Happy that home sales are turning up, happy that stock prices are up, they’re in a mood to spend more.”