Retail Sales, inflation and student loans
It's back to reality in 2022
I believe I’ve found an important driver behind the retail spending bender Americans have been on over the last year.
First let’s look at the essential time series:
Here we see US Retail sales, expressed in monthly frequency, in unadjusted dollars. Just before the corona crisis, the USA saw $450 billion a month in retail spending. The series was of course trending upward, as it would in an economy with positive nominal GDP growth (some real growth, some inflation). Then we have a few months of dramatically collapsed retail sales, followed by an unprecedented splurge of retail spending, far above the pre-crisis trend.
We’re focusing specifically on the trend 2010-2019 trend here because, in large, diversified economies, economically stability empirically requires steady, more or less predictable and moderate, growth in the big nominal income/spending aggregates. When nominal GDP grows predictably for years, it reflects predictable and stable growth in income for the median economic actor (households and firms).
It’s especially important that nominal aggregates remain on a steady trend line after long periods of stability, as firms/households tend to take out contracts that assume continued stability. When a crisis comes, like the 2008 collapse in nominal GDP, when saw a total break lower, vs the pre-recession trend, you get a period of debt failure and slow growth. I could elaborate on why but let’s keep moving with the core point.
Monthly retail sales in the USA are now around $560 billion a month. This is far in excess of what anyone would have predicted in 2019 or 2020. It’s better to be too high, than too low, but too high causes problems too, namely stripped inventories, a supply crunch, and inflation. The USA’s retail apparatus is straining, and the result is depleted inventories, burnt out workers, and clogged ports. In such a situation, price increases are the primary recourse, which obviously moves up the price indexes used to calculate inflation.
While retail sales today are 15% or 20% above a reasonable forecast from few years ago, nominal GDP is right on trend. This means the composition of aggregate spending (nominal GDP) is specifically shifting toward retail. Something’s happened to cause Americans to spend more of their total outlays at retail establishments. Certain that “thing” is not one single factor, but a mix, brought on by the response to corona.
At the end of the day one could argue the Fed is the “reason” for the surging retail sales. They steer the level of nominal spending via their control over production of US dollars, and the resulting power over market expectations this monopoly enables. However, they don’t have much control over how the aggregate is spent. They can’t twist arms, so to speak, and boost the “Investment” component of GDP, at the expense of the “Consumption” component, for example.
So while the Fed is an enabling factor behind the deluge of retail spending, by providing an appropriate monetary policy that allowed total spending to get back on to the pre-corona trend line, they’re not responsible for the excess retail spending, because retail spending is the only major nominal spending aggregate well above trend. I believe the blame for that lines substantially in the student loan payment moratorium.
The USA has a well-known student debt problem. Most of you, no need to dwell on the details, but high level, there’s about $1.7 trillion in outstanding student debt, and I figure this pulls about $20 billion a month from the pockets of the debtors.
$20 billion isn’t enough to explain the approximately $80 billion in excess monthly retail spending we’ve seen in recent months, but I believe it’s a major contributor. Years ago I used to spend more on student loans than on my one bedroom apartment, and I am sure a strong majority of the $20 billion monthly windfall has been spent, and not saved, by the consumption-starved student loan debtors. It’s likely a sizable minority became convinced as the moratorium dragged on, that their debts would be forgiven outright, and responded by loading up their credit cards, consistent with the Permanent Income Hypothesis. I’ve spoken to younger adults recently who were absolutely convinced they’d never have to pay their loans back.
Of course the federal government was never going to forgive student debts. It was a Trump program to begin with. Federal forgiveness would push the national debt up by trillions over coming years, and deplete the capacity of the ruling class to exercise power. The whole point of the USA’s student debt arrangement (or really just the general high cost of college) is to tax the middle class to fund the cadres of the DNC (universities).
It’s likely a decent proportion of the excess retail spending, which is driving our current inflation problem, will abate in early 2022. Student loans begin repayment in February, and many will have to tighten their belts as the consumer high they’ve rode for nearly two years turns into a crash.
I’ll leave you with the 5-year breakeven inflation rate plot. This series shows us what the market expects for average CPI inflation in the coming 5 years, at any given point in time. CPI inflation was expected to be a scorching 3.1% only four weeks ago, but a combination of Fed signaling, and I believe leaked news that student loans would resume payment, brought it down to 2.7% today. I expect the Fed will continue in early 2022 to pull down nominal GDP growth expectations (proxied by the 5-year breakeven), and we’ll be at a sustainable inflation rate by mid-year.