Despite Cash Stimulus, July Retail Sales Are a Clunker

Retail sales inched down by 0.1 percent in July, far below economists' predictions of a 0.7 percent rise, indicating that consumer demand -- which accounts for about 70 percent of the US economy -- is still sluggish. What's the account for poor consumer demand? Wages and joblessness.

Despite the billion-dollar cash-for-clunkers program, auto sales were up less than 3 percent -- a fine gain, but still below analysts' expectations. In fact one Morgan Stanley economist suggested that Cash for Clunkers might have taken demand away from other sectors by encouraging a huge purchase in autos that required families to cut back in other areas. Outside of auto sales, retail was down 0.6 percent. In June, retail grew by an estimated 0.6 percent.

The underlying problem with demand is that wages are down. Last week Bloomberg reported that wages and salaries fell nearly 5 percent in the last year, the worst drop since 1960. What's causing that is not just unemployment, which is officially at 9.5 percent. We're also seeing historic lows in hiring, which is causing hundreds of thousands more workers to drop out of the market from discouragement, meaning that they aren't included in the official figure. The average work week is also at a record low.

Here's a graph of retail's collapse over the last few months from Calculated Risk:

Read more analysis of the retail figures at the Wall Street Journal's Real Time Economics Blog here.