By David Stanowski
02 October 2007
Retail Sales are a key component of the U.S. Economy. The Conventional Wisdom is that consumer spending accounts for 2/3 to 3/4 of our economic activity. A large percentage of what the consumer spends is counted as Retail Sales. The Texas Comptroller's Office has data available on Retail Sales, for the City of Galveston, from 1984 to 2006. Their data shows gross sales, which offer no insight into potential net profits.
As you might expect, on a national basis, Retail Sales tend to go up month after month, if for no other reason than the population keeps increasing, and Americans never tire of buying things! When they run out of money, they just charge it! However, during the period in question, the population in Galveston was basically constant.
The first graph of Retail Sales shows a decline from $422,760,223, in 1984, to $383,443,544, in 1986, and then fourteen years of growth, that peak at $654,347,323, in 2000, coincident with the stock market top. From there, Sales declined to $614,515,102, in 2002, along with the stock market decline. Finally, there is a run up to a new high of $705,107,788 in 2005, which also follows the recent stock market rally, and the housing bubble top.
Galveston has enjoyed reasonably steady growth, in Retail Sales, over the past 22 years, however, unlike National Retail Sales, Galveston's 2006 sales did NOT exceed its Sales in 2005!
A more accurate picture of Retail Sales can be achieved by simply dividing the Retail Sales for each year, by that year's population. This Per Capita Retail Sales data series will eliminate any upward pressure in the Retail Sales data that is produced just because of population growth, and allow a direct comparison to the national data.
Galveston's Per Capita Retail Sales were $6,986.52, in 1984, and reached $12,218.02, in 2006. In 1984, National Per Capita Retail Sales were $5,494.75, so Galveston's Per Capita Retail Sales exceeded national sales by $1,462.07! Unfortunately, by 1987, Galveston's Per Capita Retail Sales had slipped below National Per Capita Retail Sales, and from there Galveston's Per Capita Retail Sales continued to lag until by 2006, they were $2,361.21 less than those for the country as a whole!
This is not a good sign! It should be expected that a town that has millions of tourists each year would easily exceed Per Capita Retail Sales, for the country as a whole, and certainly should not lag behind the national figures!
The federal government even "admits" that Retail Sales figures should actually be reduced "a little bit" due to the "small amount" of inflation that they inject into the system, to grease the wheels of the economy. When they do this, they utilize the very deceptive statistic, that they developed, for this purpose, called the CPI, to reduce Galveston's Retail Sales figures about 2-4% per year. What does this "small reduction" actually amount to?
Galveston's Per Capita Retail Sales, after adjustment by the CPI, begin at 66.96, in 1984, drop to 52.78, in 1991, recover back to 66.38, in 2000; almost, but not quite equaling their 1984 level! From there, Sales have moved sideways to lower, and remained beneath their 2000 peak!
When viewed, after being adjusted by the CPI, Galveston's Per Capita Retail Sales show no net gain over the last 22 years, and have entered a new period of weakness, since the year 2000! National Per Capita Retail Sales, after adjustment by the CPI, peaked in 2004, which is further confirmation that Galveston's Retail Sales are lagging the country as a whole.
But, what is the truth?
In my article, Inflation; the Big Lie, the point was made that we use Dollars as our standard unit to measure economic performance, but that presents a very serious problem, because the value of the U.S. Dollar has declined steadily over time.
Therefore, in order to get a sense of actual, or "real performance", we must find some way to factor out the decline in the value of the Dollar. There are many possible ways to do this, but rather than use an artificially contrived, and perpetually understated method, such as the CPI, I use the price of gold. This is not absolutely accurate, but a market price gives a much better approximation than a government statistic!
Dividing Per Capita Retail Sales, by the price of gold, at the end of each year, created the data series called "Real Per Capita Retail Sales", shown in the next graph.
Real Per Capita Retail Sales hit a low, in 1987, at 14.36 ounces of gold. After that, they rose for thirteen years, where they peaked, in 2000, at 40.81 ounces of gold, as the stock market topped. At that point, we entered a new hyper-inflationary period, and Galveston's Real Per Capita Retail Sales have declined more than 50% since then; lagging those at the national level!
What does this data tell us?
The expansion of the 1980's and 1990's did indeed end near the stock market top, in 2000, and, regardless of the inflationary illusions created by the real estate bubble, or new highs on the DJIA; a recession (negative growth) began in 2001! As the financial crises, and job losses continue, more and more people should begin to see this!
Does the change in the price of gold, between 31 December 2001, and 31 December 2006 overstate the amount of inflation, and its effect on Per Capita Retail Sales? During that period the price of gold increased 128.67%, the price of oil increased 207.71%, and the CRB Index (a basket of commodities) increased 106.49%. Therefore, the Real Per Capita Retail Sales data series, created using the price of gold, should be a whole lot closer to the truth than adjusting Per Capita Retail Sales, using the government's CPI.
Most analysts don't adjust Retail Sales data for population or inflation.The typical analysis, done on this data series, is the Year-Over-Year Rate of Change, on the monthly data. However, since Galveston's Retail Sales are reported quarterly, instead of monthly, the YoY RofC was run on the quarterly data. The graph below shows that the RofC, for Galveston's Retail Sales, peaked at 19.54%, in 3Q 1999, and then dropped to -6.63%, in 4Q 2001.
Since then, RofC has pushed back up to 16.98%, in 4Q 2005, but turned negative again to -15.88%, in 4Q 2006. This study shows that the positive momentum for Retail Sales, in Galveston, peaked in 3Q 1999.
With an estimated 4.4 million tourists per year (source: GEDP for 2002), adding their purchases to those of the local population of only 57,247, at the 2000 census; Galveston's Per Capita Retail Sales should always be expected to exceed those for the country as a whole. A dynamic local retail sector, energized by tourist dollars, could help to carry the local economy. Unfortunately, since 1987, Galveston's Per Capita Retail Sales have lagged farther and farther behind National Per Capita Retail Sales! This is not good news!
In addition, even though those who work in the retail sector, in Galveston, made more money, i.e. Dollars, in 2005, than they did in 2000, most of them have seen their business, and personal expenses go up even more, so their real income is less than it used to be!!
This decline in Real Per Capita Retail Sales is not unique to Galveston, during this period, but since the Galveston economy does not seem to have above average strength in other sectors, Galveston is most likely even more dependent on its Retail Sales, than most places. With its retail sector lagging behind the already declining Real Retail Sales, for the country as a whole; this does not bode well for the Galveston economy!
Does the concept of "Real" Per Capita Retail Sales, which are adjusted by the price of gold, versus "Nominal" Per Capita Retail Sales, measured in current Dollars, make sense in real life? I think that it does. If Galveston business owners are asked whether they feel that they are doing better now than they were in 2000 (at the peak in Real Per Capita Retail Sales); I think many will say that if even they have somewhat higher incomes, they still aren't doing as well, and they can't quite figure out why!
Sales tax collections, from Retail Sales, were already lower in 2006, than they were in 2005, and based on national data, 2007 will probably come in lower than 2005, too! In addition, the inflation since 2001 means that the City of Galveston can not buy any where near the same goods and services today, as it could in 2000, with the Dollars it receives from sales tax. The lack of real growth, in the local retail sector, combined with high inflation, should already be putting a severe squeeze on the City budget.
As I was completing this article, the Texas Comptroller's Office changed their definition of what they included in Retail Sales. Basically, they removed some sales such as those for food and beverages. Since the data, under the new definition, only goes back to 2002, I decided to use the old data that goes back to 1984, which provides a lot more history.
If anyone needs clarification on these changes, contact Carmen Guajardo at 512-463-4966 or Carmen.Guajardo@cpa.state.tx.us. Carmen has been most helpful to me in putting together this article!
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