The Washington Post still hasn't heard about the housing bubble. (News takes a long time to get to Washington.) It featured a major article today discussing the prospect of retail sales recovering from depressed levels, explaining that consumers are feeling more confident, therefore sales may now bounce back.
The problem in this story is that sales are not depressed. Sales had soared earlier in the decade driven by the wealth created by the housing bubble. This is well known (outside of the Post) housing wealth effect, in which an addition dollar of housing wealth is projected to lead to 5 to 7 cents in additional annual consumption. The $8 trillion in housing bubble wealth caused consumption to soar and savings rates to fall near zero.
With the collapse of the housing bubble and the corresponding decline in the stock market, savings rates are returning to more normal level. However, the most recent savings rates, which are near 5 percent, are still below the long-run average of more than 8 percent. With a population that is heavily tilted towards savings (the baby boom cohort is in its peak saving years) it is more likely that the saving rate will go higher than lower. These means that we should anticipate further declines in retail sales rather than the recovery sought by the Washington Post.
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