The Savings Rate, Personal Balance Sheets and Small Retailers
Small retailers are going to have to remain focused, resilient and persistent. While an upturn is likely this fall, recovery is just as likely to be a slow and protracted process. The latest news makes that point clear.
The Commerce Department reported today that personal income in May increased by 1.6% (most of it the result of government stimulus spending and one-time tax cuts), while consumer spending increased only 0.3%.
There are several pieces of news here. First, consumer spending in May rose after being flat in April, and down 0.3% in March. Good news here. Further, the savings rate jumped in May to 6.9% from 5.6% in April, the May number being the highest level since 1993.
That's good news in the longer term, but suggests that the recovery in consumer spending will be a slow process. We're going to need to see savings rates like this for quite a while before the recovery can firmly take hold.
Just as small retailers (like most businesses) have pulled in their horns in an attempt to preserve cash, so have consumers. And as small retailers have worked to strengthen their balance sheet by reducing debt and accumulating cash, so to have consumers sought to repair their personal balance sheets.
This is pretty well understood. While we can expect to see retail sales beginning to rebound in the fourth quarter, we will not experience a substantial increase in retail sales until the process of repairing personal balance sheets plays itself out. That's not likely to happen over the next few quarters.
That's why many were leery of the stimulus bill as it was structured and passed in the early days of the Obama administration. While the programs initiated by the Fed and Treasury had the effect of unlocking credit markets and keeping the financial system from collapse, with so much of our economy dependent on consumer spending, and the consumer flat on their backs, no amount of targeted government spending could accelerate the process of repairing personal balance sheets as much as broad-based personal tax cuts.
The stimulus spending will take time to spread through the economy and begin to really help personal balance sheets in a broad-based way. It will take longer than tax cuts would have. And until personal balance sheets bounce back, small retailers are going to be scratching and clawing for every sales increase.