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The Biggest Flaw in Economic Analysis


There's a huge difference between improving economic data and improving mood/sentiment about our economic circumstances.

Retail sales and the holidays go hand in hand. After all, the day after Thanksgiving is called "Black Friday." Take a look at this chart I put together from the US Census Bureau's non-seasonally adjusted retail sales data:

Click to enlarge

What I wanted to do here was look at how much each month's retail sales contributed to an annual retail sales amount. You can see that December is by far the most important month of the year for retailers, which makes sense as the holiday shopping season is in full swing. November is the second biggest month but still trails December by at least a full percentage point in terms of contribution to annual sales.

But like the Greek situation with debt-to-GDP, the question that goes unanswered is what is going on in the background while so many people cling to the print on this number. Stores are opening on Thanksgiving night with talk of strikes at retail outlets, while people repeat the exact same mistakes that brought about the credit crisis in the first place. And in this election year we simply traded in non-stop political ads a few months ago for non-stop shopping ads. There's a huge difference between improving economic data and improving mood/sentiment about our economic circumstances. And what many folks don't recognize is that in the world we find ourselves in, the chasm between haves and have-nots is widening.

Another data point you hear a lot of chatter about is the improving housing market. And one of the most often-cited statistics about that improvement is housing starts. The theory is simple: Companies won't build what people don't want to buy. That may be true in general, but I would offer up this chart as a counterpoint:

This chart takes single-family starts and multi-family starts (five units or more) and converts them into percentages of each month's reported starts number. What I didn't annotate is that in bull markets, when mood is positive, single family starts dominate. And at turning points, we can actually see rotation between single and multifamily housing development.

From where I sit, the biggest driver in the rise of housing starts these past few years has been the increase in multifamily starts. This makes sense as a "me, here, now" response since renters can leave an apartment a lot easier and faster than a homeowner can leave behind a house. And as people make the shift towards local communities with higher density as a more economical way to live and to shun the excesses of suburban living (big square footage, long commutes, relative isolation), that sets in motion a number of other trends for years to come that will not follow moods and attitudes of the past. Whether we feel good or bad about that remains to be seen.

But at the end of the day, our attitude shapes everything. And our attitudes aren't shaped by charts and graphs, they are reflected in them. But until economists stop acting like the opposite happens, we're bound to see more of the same ideas and policies that we already know won't work.

Twitter: @japhychron
No positions in stocks mentioned.
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