Cash for Clunkers - The Hangover

In September, total retail sales fell by 1.5% sequentially (seasonally adjusted). This almost totally reverses the 2.2% gain for August. On a year-over-year basis, total retail sales were down 5.7% -- a slight improvement from the 5.8% year-over-year decline in August (remember that things really started to fall apart last September).

However, the headline number is a bit misleading since it includes auto sales, which were greatly inflated during August by the "Cash for Clunkers" program. After the program was over, auto sales fell right back to where they had been before the program started. If autos are excluded, sales were up 0.5% for the month and off 4.9% from a year ago. In August, retail sales excluding autos were up 1.0% from July and down 6.3% year over year.

Sales of autos and parts fell 10.4% for the month and are down 9.3% year over year. That is in sharp contrast to the 7.8% monthly gain and just 3.2% year-over-year decline in August when the Cash for Clunkers program was in full swing. However, auto dealers were the only type of store to see a significant decline in sales in September (I don't think the 0.2% decline for building materials stores is all that significant).

Some of the gain in sales ex-autos came from gas stations, where sales rose 1.1% for the month on top of a 4.7% gain in August.  That mostly reflects higher gasoline prices -- which, while well below a year ago (year-over-year sales were down 25.3% and were down 26.8% in August) have been inching up as the price of oil has recovered.

The "Steady Eddie"-type stores performed well in September, with food and beverage stores like Kroger (KR - Analyst Report) and Safeway (SWY - Analyst Report) seeing a 0.7% gain for the month and an actual year-over-year gain of 0.4%.

Similarly health and personal care stores (what you and I would call drug stores) like Walgreen's (WAG - Analyst Report) posted a 0.8% monthly gain on top of a 0.5% gain in August. On a year over year basis drug store sales are up 3.5%. There is not a breakout between "front of store sales" of things like toothpaste and shampoo, as opposed to prescription sales, but it is safe to assume that rising drug prices played a role there, particularly on a year-over-year basis.

We even saw gains in some of the more cyclical store sales, with furniture store sales up 1.4% for the month (down 6.5% year over year). Clothing stores saw a 0.5% monthly gain, on top of a 1.1% increase in August. These are some serious signs that consumers are starting to open up their wallets. In the short term, this is very good news for the economy. 

However, with income growth non-existant, it means that the savings rate is still falling back. Longer term, it is vital that the savings rate rise back towards the 8 to 9% rate that was considered normal in the 1960's and 1970's here in the U.S. (and is still considered normal in most of the other advanced economies).

The over-reliance of the U.S. economy on consumption and the resulting lack of investment is perhaps the single largest imbalance in the world economy. It is simply not sustainable over the long term. Without a higher savings rate, the economy is sitting on a weak foundation.

However, the rebuilding of the savings rate will mean that spending rises at a slower rate than income does. This process will mean that the recovery will be much slower than would be the case if the savings rate were stable or falling.