July 27, 2020

The Tenuous Recovery in Retail Sales


In previous posts, I’ve reviewed the impact COVID-19 has had on jobs and unemployment. An additional dataset we look at is the Retail Sales Report provided by the U.S. Census Bureau. It’s another great source to help understand the economic impact the COVID-19 virus is having on the hourly workforce in both retail and restaurant businesses. Retail sales performance has been remarkable through this crisis and in this post, we’ll review how Retail Sales have faired, what is driving the performance and how future results are highly dependent upon action by Congress.

Sharp Decline, Sharp Recovery

Much like the employment metrics I’ve reviewed in previous posts, the drop in Retail Sales in March and April was unprecedented. At the end of April, Retail Sales were down 22% compared with January levels. The only sectors within retail that didn’t decline were Food and Beverage Stores and Non-Store Retailers (mostly eCommerce). The hardest-hit sectors were Clothing, Furniture and Home Furnishings, Food Services and Dining, and Electronics, all of which dropped over 50% from January.

However, unlike jobs which are still down roughly 10% since January, Retail Sales quickly recovered and as of June, were down only 1% from January levels. Six of the 13 sectors measured had increased sales when compared to January despite the crisis.

Source: U.S. Census Office; Humanity’s Calculations

In the chart below you can see which sectors’ sales have been hit hardest through June. Restaurants, Bars, Gas Stations, and Clothing are all significantly down compared to January, while eCommerce, Grocery Stores, and Automobiles have shown increases so far this year, reflecting changes in consumption patterns due to the virus. Losses in restaurant sales and specialty retailers have largely shifted to grocery and eCommerce, resulting in a very minor overall decline in total Retail Sales.

Source: U.S. Census Office; Humanity’s Calculations

Historical Comparisons

The rate at which Retail Sales have rebounded from their 22% drop to only 1% down from the peak in January has been surprising given that the economy has lost 14 million jobs and unemployment is still at 11.1%. During the Great Recession of 2007-2008, Retail Sales peaked in November of 2007 at $378.9B and didn’t make it back to that level until 41 months later in April of 2011. If Retail Sales continue on their current trend for July data, they will return to pre-COVID levels in only five months.

Source: U.S. Census Office

The question then becomes, how have Retail Sales normalized so quickly during this crisis as compared with the great financial crisis of 2008, while unemployment remains so high?

Source: Bureau of Economic Analysis

In our analysis, we looked at Personal Income. Personal Income is the total of all income received by all individuals or households in a country. In 2008, Personal Income peaked in May and did not recover to that level until 31 months later in December. Generally, Retail Sales will recover when Personal Income recovers, and as a result, households have money to spend.

Personal Income

What’s interesting about this crisis is that despite the violent spike in unemployment, Personal Income has not fallen, in fact, it has risen. In the chart below, you can see Jobs, Retail Sales and Personal Income plotted as a % of January 2020 levels. While Job Losses are down 10% through June, Personal Income never declined and is up 4% through May when compared to January 2020.

Source: US Census Office, Bureau of Labor Statistics, Bureau of Economic Analysis; Humanity’s Calculations

As shown in the table below, this is because while Wages & Compensation have declined proportionally to job losses, Government Social Benefits (i.e. Unemployment Insurance) has more than filled the gap in lost wages, driving income higher than prior to the crisis. Households actually have MORE disposable income to spend than prior to the crisis and this income replacement is driving the recovery of Retail Sales. In 2008, the government did not provide enhanced unemployment insurance and this is the reason why Personal Income and Retail Sales took significantly longer to recover.

Source: Bureau of Economic Analysis; Humanity’s Calculations

We are still relatively early in this economic crisis. The enhanced unemployment benefits that have driven this replacement of lost income for households expired last weekend and without an extension, we can expect to see Personal Income decline in August and as a result, Retail Sales to also decline again. As of writing this, that extension is still being negotiated. We’ll be watching what happens in Washington this week very closely as it will have a major impact on which direction the economic recovery takes from here.