Unsustainable

The US economy is recovering rapidly from the COVID-19 disaster. The rollout of vaccines, the lifting of restrictions, loose monetary policy, and a massive increase in government spending are all playing their parts.

The problem is that the massive government "stimulus" checks have put the economy in a strange position, where retail sales are far above where they would be if COVID had never happened, even as the production side of the economy remains relatively weak.

Friday's report on the retail sector showed that retail sales were unchanged in April, remaining at essentially the same lofty level they were in March. However, the lack of an increase in April shouldn't have been much of a surprise. Even with no increase in April, retail sales were 17.9% higher than they were in February 2020, pre-COVID. To put this in perspective, that's the fastest gain for any 14-month period since 1978-79. A key difference? That period in 1978-79 had double-digit inflation, versus the 3.1% increase in consumer prices since February 2020.

Another way to think about how high retail sales have been lately is that if COVID had never happened and sales since February 2020 had increased at a more normal 4.5% per year pace, it would have taken until November 2023 for retail sales to reach where they were in March and April this year. In other words, sales have arrived at the recent level about two and half years ahead of schedule.

This means is that growth in retail sales will face a headwind over the next few years as the extraordinary recent bouts of "stimulus" peter out, roughly offsetting the benefits of more jobs and higher wages.

Meanwhile, even though retail sales have surged to abnormal highs, the production side of the economy is still operating below pre-COVID levels and even further below where production would be today if COVID had never happened. Manufacturing production is down 2.7% versus February 2020. Part of this is damaged supply chains. The demand for new cars and trucks has rarely been higher. Retail spending at auto and motor vehicle dealerships was 33.1% higher in April than in February 2020.

And yet motor vehicle production (excluding parts) is down 18.1% versus February 2020, largely due to a shortage of semiconductor chips. But it's not only autos. Manufacturing excluding autos is down 0.9% versus February 2020.