Retail sales still far below trend despite January spike.  The Census Bureau reported that retail sales, unadjusted for price changes, were up 1.0 percent during the month of January, a noteworthy departure from the previous six months of decline.  The report showed significant pickup in monthly sales of motor vehicles (1.6 percent), electronics and appliances (2.6 percent), food and beverages (2.1 percent), and at gasoline stations (2.6 percent).  Meanwhile, sales of building materials and at associated suppliers continued to fall in January (-3.2 percent), likely signaling further weakness in the upcoming report on January home construction.  Furthermore, retail sales are 9.7 percent lower than they were in January 2008 and far below the general trend of the past few years. (See Chart)  While the recent bump is encouraging, employers are unlikely to begin rehiring unless they anticipate a sustained period of increasing consumer demand, which is more doubtful given February’s drop in confidence.

Consumer Confidence Declines.  February results from the Reuters/University of Michigan survey of consumers show that continuing job losses and declining household wealth are eroding consumer confidence.  The index of consumer sentiment declined to 56.2 from its January value of 61.2.  The index has dipped close to its 28-year low of 55.3, which it hit last November.  The Michigan index of expectations six months from now declined from 57.8 in January to 49.1, hitting its lowest level since 1980.  The movement of these indices suggest that consumers spending is unlikely to recover soon.

U.S. trade deficit narrowed in December.  The worldwide economic slowdown has dramatically reduced U.S. international trade in goods and services.  The trade deficit improved by $1.7 billion (4.0 percent) in December as a reduction in imports outsized a reduction in exports. Monthly imports fell $10.2 billion (5.5 percent) due in part to the slide in the price of crude oil.  Even though the quantity of crude oil imports increased from November to December, the drop in oil prices resulted in a lower outflow of revenues.  Notably, this was the first increase in the quantity of oil imports after several straight months of decline, indicating that consumers are starting to drive more. 

Household finances suffer from falling incomes, collapse in housing, stock markets.  The Federal Reserve released the 2007 results of its triennial Survey of Consumer Finances, which showed weak or negative economic growth for all but the wealthiest households.  The median family income fell by 0.4 percent between 2004 and 2007 after it had risen 1.7 percent and 9.6 percent in the two preceding 3-year intervals.  Accompanying the stagnation in income was a shift toward other means of building wealth – namely, the accrual of home equity and other capital gains.  Between 2004 and 2007, the share of family net worth coming from capital gains more than doubled from 3.2 percent to 6.7 percent while the share coming from wages fell from 69.7 percent to 64.5 percent.  This shift left many families vulnerable when the housing and stock markets – the two primary sources of capital gains – collapsed.  Because of the shift in wealth to stocks and home values, it will take that much longer for households to recover and begin spending again.