I have been writing quite a bit about consumers over the past few weeks, because, despite the importance of the business sector in this expansion, consumers are still the dominant source of demand. When consumer spending rises, it drives activity throughout the economy. So the good news last week was that consumers continue to increase spending at a solid, if unspectacular pace. Retail sales in September increased 0.6% from the previous month, the third consecutive month in which sales have risen by 0.5% or more. The last time that happened was in the fourth quarter of 2007.
In the second half of 2008, when the recession went from a downturn to a free fall, consumers cut back on spending more than we have ever seen before. Historically, retail sales flatten out in a recession, but the severe drop of more than 11% during the second half of 2008 was, by far, the largest that retail sales have ever declined. The recovery from that drop has been healthy. But overall, retail sales as of September 2010 were still about 2.5% below the level of June 2008. Nevertheless there is a healthy upward trend in retail sales drive by a combination of pent-up demand and rising employment and incomes. Although consumers are worried about the future and are not able to tap into their assets as much as in the past, they are boosting spending and are likely to continue doing so over the next several quarters. This growth, while not a boom, provides a sound underpinning to the economy supporting overall GDP growth.
For the real estate sector, the growth in retail sales has several important impacts. First, as spending increases, businesses are forced to hire to meet that demand leading to greater demand for office space. Higher retail sales lead to higher demand for warehouse and distribution space to move the goods. And finally, as consumers boost spending it supports retail markets across the county.
Consumers remain a vital part of the economy and the latest data suggests that their role in the recovery is likely to increase in the months and quarters ahead.
Senior Economist, Senior Managing Director, Research