In light of yesterday’s results for Producer Prices, and Retail Sales and Today’s results for Consumer Prices, I’m reworking my analysis of the possible correlation between falling home values and declining consumption of the most “discretionary” retail items.On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.
The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.
As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.
In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for the last seven months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).
The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the PPI and CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.
As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.Given the anecdotal accounts of homeowners drawing equity out of their homes with refi’s and HELOCs and using the proceeds to buy consumer goods, it could be interesting to attempt to “shift” the retail spending in time as the decline to home values would surely precede a pullback in consumer spending but for now I’ll leave it aligned and work on the shifting in a later post.
To make the analysis even a bit more formal (at the prompting of reader Deejayoh) I also plotted the year-over-year changes an overlaid a 12 month moving Pearson’s correlation in order to see the “exact” correlation between the two data series (click for larger chart).
As you can see, although there was a significant correlation of the declines of these series starting in August 2006, this relationship has been falling away as real home values consistently contract and real retail sales remain negative but not falling as consistently.This is probably a reasonable conclusion as expecting perfectly correlated changes in home values and consumer spending seems unlikely BUT it is probably important to note that home values and the level of consumer spending on discretionary items are in fact both consistently contracting.
