November’s retail sales plunged 1.1%, the biggest monthly decline since April. And the small gain in October retail sales was revised down, and now sales in that month show a tiny decline.
The sharp drop in consumer spending on retail goods was not supposed to happen. Analysts expected spending on retail products to remain strong since spending that normally would have gone into travel, entertainment, and recreation has been re-directed to goods.
On top of that, analysts cited a relatively higher personal savings rate, estimated at 13.6% in October, as evidence that consumers had plenty of cash available to spend. The problem with that analysis is that the personal saving rate is overstated---perhaps by half.
The personal income figures that are used to estimate personal savings include income flows for small businesses (i.e., proprietors' income). The proprietor income category includes a wide range of unincorporated businesses, excluding sole proprietors, partnerships, and other small businesses.
According to the Bureau of Economic Analysis (BEA), proprietor’s income (nonfarm) hit a record high of $1.823 trillion in September, and only dropped marginally in October. In both months, the level of proprietor’s income stood $100 to $150 billion above the levels that were in place before the pandemic.
According to a senior official at BEA, one of the reasons proprietors' income is elevated is that loans from the Payroll Protection Program (PPP) are being scored as a subsidy.
I have never considered a loan as a subsidy, especially when the loan has to be repaid if the borrower did not adhere to the government guidelines. BEA estimates that PPP loans have elevated the proprietor’s income by $200 to $300 billion. At this writing, BEA has no information about the amount of PPP loans that have been repaid. If and when PPP loans are repaid it will be scored as a negative subsidy, lowering the overall level of personal income and savings.
But there are other reasons to believe proprietors income is grossly overstated. Hard data on small business income is spotty at best, and accurate data will not be available to firms file 2020 tax returns in 2021. Yet, there are ways to infer the squeeze on small firms.
Small businesses pay federal taxes based on the business owner's total earnings and these tax payments show up alongside workers taxes in federal withheld income tax receipts. Over the past 9 months, Federal withheld income tax receipts are off 15% from year-ago levels, nearly 3X times the drop in employment. I am guessing that a large part of the record drop in federal taxes reflects the sharp drop in income (if not losses) of small firms. That would mean reported levels of personal income are overstated, and the personal savings rate could be reduced by almost half.
The back-to-back declines in retail sales data should be a wake-up call to Congress and investors in that a vast majority of consumers do not have the cash flow to support ongoing gains in spending. The good news is that Congress is finalizing a bi-partisan fiscal package reported to be around $900 billion. The bad news is that a fiscal package twice that size is needed.