US Retail Sales March Preview: Can consumers stare down unemployment?

• Sales are forecast to post the largest monthly drop on record.
• Historic job losses and business closures to cripple consumer spending.
• Higher than normal food, staples, household and internet purchases may mitigate decline.

American consumption is thought to have fallen off a cliff in March as unemployment soared with government ordered shutdowns and the closure of many stores in about half the country.  

Monthly retail sales are expected to decline 8% and purchases excluding automobiles to drop 4.8%. Car dealerships in almost all of the major population centers are closed. The range of estimates in the Reuters survey is from -24% to -0.9%. Sales were down 0.5% in February, ex-autos lost o.4% and the control group was flat.

Retail sales and the financial crash

If the predictions are accurate this would be far worse than the demand destruction during the 2008 financial crisis. Even at the height of the crash in the fall of that year the largest single decrease was 3.9% in November and the six negative months from July to December all told equaled12.4%.

Reuters

Uncertainty is high over the extent of the retail drawdown because such massive and nearly instantaneous unemployment, 17 million people have filed jobless claims over the past three weeks, has never occurred before. Any estimate for spending depends on how consumers, employed and not, view the future and the likelihood of returning to work and normal life. 

Unemployment insurance and demand substitution

Unemployment insurance will replace a portion of the income lost for those laid off but it cannot maintain usual levels of consumption. Internet sales have risen dramatically and though it seems probable that they have not fully compensated for the closure of much of the brick and mortar establishment the numbers are as yet unknown.

Some of these questions will be answered in the March retail figures which break out non-store sales as the Census Bureau calls on-line purchases.

Some food purchases have climbed substantially in the first week of April.

Fresh produce sales are up 14.2% over the same week in 2019, frozen food sales are 47.4% higher and dry goods or shelf-stable purchases are up 48.1%.  Food service sales however remain in deep decline and are one reason produce supplies are plentiful and often reduced in price.  

Consumption and the US economy

The well-known dependence of the US economy on consumption may play through to the largest quarterly decline in GDP on record in the second quarter.

In the final three months of 2008 the US economy contracted 6.3% followed by 6.4% in January February and March of 2009 and -0.7% in April May and June. After the three quarters of recession GDP expanded 2.2% in the third quarter of 2009, 5.6% in the fourth, 3.7% in the first quarter of 2010 and 1.7% in the he second, averaging 3.3% in the 12 months after the recession.  

The estimate for growth in the first three months from the Atlanta Fed has dropped from 3.1% to 1% and a new projection will be released after Wednesday’s retail sales.

Consumer sentiment

Much will depend on the attitude of consumers.

 For the majority of laid-off workers, many of whom are hourly and on the lower end of the pay scale, consumption must fall as their income has become unemployment insurance and savings.

It is the remaining 150 million employed Americans who will determine the immediate course of the economy.  Do they view the work stoppages as temporary and have they been willing to maintain a relatively normal level of consumption through the shutdowns? 

Michigan consumer sentiment in March was 89.1 in a poll conducted before the majority of the job losses became unemployment statistics.  April’s preliminary score of 71 brings outlook down to the level of December 2011 and the fitful recovery from the financial crisis.

Michigan Consumer Sentiment

FXStreet

Retail sales in the second half of 2011 averaged a monthly gain of 0.4% which helped to supply a 2.4% GDP expansion in the period.

The $2 trillion support and stimulus package passed by Washington which offers business assistance in maintaining payrolls for several months and the loan and securities purchase programs enacted by the Federal Reserve aim to help insulate against further massive layoffs and maintain consumption.  But it is unknown how successful they will be and how consumers will respond.  

Conclusion and the dollar

The enormous job losses perpetrated by the public health response to the Coronavirus may or may not be temporary. Restitution in the labor market depends on the speed and extent of the reopening of full economic life.  The potential for a plunge in consumption commensurate with employment holds considerable danger for the US economy as it likely entails further job losses and the prospect of a self- reinforcing economic decline.

For the dollar the safe-haven panic of March has waned and though the unemployment claims numbers have set a high standard for disaster they are only one side of the story.  The other is the impact of such job losses on economic activity in the United States.  

Currency markets are not so inured to this catastrophe that a worse than forecast retail sales for March, implying even greater collapses in the months ahead and by extension to the rest of the world, will not bring back the dollar safety trade.  If the reliably free-spending consumer sector in the United States has faltered there may yet be much more to worry about.