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Falling Retail Sales: Good News?

Posted by: Michael Mandel on April 14

Retail sales in March fell by 1.1%, with the biggest drop coming in electronics and appliance stores, which fell by 5.9%. This provoked a herd of handwringing among economists, investors, and journalists. The WSJ wrote:

U.S. retail sales in March made a broad-based decrease that left a shadow over recent signs of improvement in the slumping economy


“It’s disappointing,” said Hugh Johnson, chairman of Johnson Illington Advisors in Albany, N.Y. “It tells us quite clearly that consumers continue to retrench, or are doing less borrowing and spending and more saving.”

BZZZZ! Thanks for playing.

In fact, falling retail spending is a sign that the economy is starting to undo the damage of recent years caused by excess borrowing.

Remember that a hefty chunk of retail sales—and certainly electronics and appliances—is comprised of imports. So when you go and buy that flat screen television, you are not creating factory jobs in the U.S., since the tv was almost certainly manufactured abroad.

To put it another way, when you buy that tv, most of that money is not stimulating the U.S. economy. Instead, what you are mainly doing is creating is a bigger trade deficit, and a bigger debt to the rest of the world.

(A note on numbers: I’m currently deep inside the BEA’s input-output tables. Soon I’ll emerge, and have a better idea of how much of electronics purchases stay in the country, and how much goes abroad).

We don’t want a bigger debt. We’d like to see the trade deficit fall, and the pocketbook savings rate rise. That will accelerate the rate at which the U.S. can emerge from this financial crisis.

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Reader Comments

Brandon W

April 14, 2009 05:41 PM

More retail space vacated in Q109 than in all of 2008 combined:


April 14, 2009 09:18 PM

I'm going to draw a distinction in terminology here between necessary and good. It would be worse if retail sales did not fall, but I know enough people in retail and in jobs supported by advertising not to cheer about it.

That's why I would say our problem is structural, because a number of retail and other service jobs will have to be replaced by something different, and in the medium to long run, we don't know quite what that something different will be.

Joe Cushing

April 14, 2009 11:16 PM

Maybe 2 years ago, you were telling us that the trade deficit didn't matter. Now you have two posts telling us about how it is good that the trade deficit is shrinking. Did I miss the post where you talk about what changed in your analysis? I agreed before and I to agree with the change but I just wondered if you spelled it out and I missed it.


April 15, 2009 01:41 AM

Right on Joe Cushing.Mike is coming around to the point that some of us have been making for a long time now,namely that we as a country need to start living within our means.This will cause pain in the short run,but we will be better off in the long run,as we throttle consumption and increase our savings rate.

Mike Mandel

April 15, 2009 03:28 PM

Hi Joe,

I started coming around to that position in June 2007, when I wrote my cover "The Real Cost of Offshoring." Pretty much everything since then has pointed in the same direction, including my 2008 cover about multinationals. And if you look at the the powerpoint I recently posted on February 26, the Failure of the Internet Decade, I spell it out in detail.

The coming post on the policy implications of the reverse Black Swan will make it even clearer. If you want to run an economy dependent on innovation, which is highly uncertain, I think you want to be less leveraged in other parts of the economy. More to come.

Brandon W

April 15, 2009 04:31 PM

You said it well. What is scary is to think how much talent was diverted to the wrong place because of the severe mis-allocation of resources. How much of the right kind of talent wasn't developed? How many of those who could have had their talents properly applied ended up as mortgage loan originators, or tucked into a cubicle somewhere calculating Gaussian copula functions that made the mortgage to the unemployed guy on his crumbling porch in a Mississippi swamp look like AAA debt? This is a crisis from the implosion of the second worst mis-allocation of resources in human history (the worst one is yet to come); and that includes human capital, human talent. Unemployment will continue to grow and will not retract until that talent is recovered and re-allocated. But unlike money, we can't just run the printing presses to create new talent.


April 15, 2009 11:04 PM


Thanks. I assume you're talking about the stimulus spending as the worst example? Just trying to understand what you're saying.


April 16, 2009 03:05 AM

When you buy that TV, most of the price tag does not go to the factory that produced it. A good part goes to the retailer or the landlord, which are likely to support jobs or wealth in the US. Then there are taxes, utilities and the shipper (eg in the case of Wal-mart) may be American. When you buy that coffee, the markup is even larger...

Brandon W

April 16, 2009 08:40 AM

Actually, basing our societal growth patterns on an infinite supply of cheap oil is our biggest misallocation. The current collapse of the exurbs because of the end of cheap credit is only the beginning. When oil is no longer cheap we'll be very sorry we've built sprawling development with such limited, shared (public) transit systems. We were already on our way to painfully expensive oil before the economic contraction; but the contraction has contributed to the long term problem. Oil companies have shut down existing rigs and cut back on looking for new sources. This at a time when existing fields are depleting at a shocking rate. It's simple supply and demand. Long term demand won't contract much, but the supply is dwindling. What's more, it's not just about quantity of oil, but the quality and ease of extraction. We've already tapped all the high-quality, easy oil. What's left is increasingly difficult to get and lower quality when we do. We'll never run out of oil... it'll just get increasingly expensive until it's not worth going after any longer. And our entire civilization, as we know it, is based on that oil. I'm a huge proponent of renewable energy resources, but no combination of wind, solar, or otherwise will replace oil. Oil is far too energy-dense to be replaced by them. Maybe we tap nuclear and geothermal to generate electricity as well, and it provides enough for us to get by with good public transit systems in place and extreme energy efficiency? But have you looked out your window? What are the public transit lines and power lines in your neighborhood looking like?

That's our greatest misallocation of resources, and that's our greatest crisis. And it could be here inside 10 years.


April 16, 2009 10:18 AM


I'll agree that's going to be a pretty severe crisis. If I remember correctly, the only energy sources available today that are abundant enough to replace oil entirely are coal and breeder reactor nuclear fission (and coal poses a big carbon problem). My old prof said, "Fusion has been 50 years away for 50 years". So that's a technological and political mess. The wind, solar, and geothermal do take some of the pressure off, but we'll have some big decisions on our hands soon. Lots of jobs, though.

In terms of energy density, that matters more in storage than generation. You couldn't run your car on coal or nuclear, but if battery or fuel cell technology improved sufficiently, that wouldn't be an issue. I think we're less than 10 years away on this part of the equation, so it worries me less if Obama means what he says here. Again: Big cost, lots of jobs.

Suburban sprawl is an issue (that I contribute to) ... which we will have to pay for for a while. I think the main thing that makes it necessary is that my wife and I wouldn't feel safe in a city, and the schools in those districts are much worse. That social problem is as expensive to tackle as energy and transportation, and we completely lack the political will to do what's necessary there. My gut says we'll tackle the other two problems and duck this one.


April 16, 2009 07:31 PM

Brandon W,

I'm with you on the misallocation of talent; in fact, I thought your delineation was just a bare beginning of a good listing, although on second thought, perhaps it does mostly boil down to the oil thing, the natural gas that is held mostly by Iran, and the slim chance that enough nuclear power could be brought on line to just keep the status quo, if there's even that much uranium in the world (I read that there is not).

It does seem a crying shame, though, that so few capable people seem to have any excuse whatsoever to work on the myriad of solutions that are conceivable to smooth the way forward. For instance, I can't even find anything whatsoever, other than a broom, that would rid home solar panels of heavy snow. As for investing, I've been pretty much in a state of paralysis except for when I read about Cisco's solution for transforming computer center equipment utilization from 15% to 80%, and they are sitting on $30 billion cash -- I bought shares. As far as I know, they have retained talent and they understand what business they are in and what is needed. Refreshing. I almost don't care whether it was a good move. It was just a way to vote with my dollars. I can barely grasp why this kind of thing remains so rare. Meanwhile, my town insists on widening streets while the populace protests.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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