Photo: AFP/Herika Martinez
United States dollars. Photo: AFP/Herika Martinez

Although retail sales in the US have been strong, some important portions of the consumer market, including home and vehicle sales, have lagged expectations.

Existing home sales are down 1.5% year on year, and light vehicle sales are down about 2%. Overall, advanced retail sales are up 6.6% year on year, although negative surprises are not uncommon. Bed Bath and Beyond reported disappointing earnings today and its stock fell 14% in after-hours trading.

During the past year, monthly changes in retail sales have tracked changes in credit card balances with a correlation of about 60%, suggesting that consumers are highly dependent on short-term credit to maintain spending.

Change in retail sales vs revolving credit

The variable that tracks monthly changes in revolving credit best is retail sales ex-auto.

Is this an indicator of prospective economic weakness? Maybe, particularly if it continues for quite some time. Below s a chart of the 12-month rolling correlation of changes in revolving credit vs. changes in retail sales ex-auto,

Retail sales based on revolving credit

The longest period of high correlation between change in revolving credit and change in retail sales occurs just before the 2008 crash. The correlation remained elevated (in the 60% range) for roughly two years.

There has been one blip in the series at the end of 2013 and in early 2014, when the correlation rose briefly to around 60%, and no recession followed. The most that can be said of the present high correlation between spending and credit card balances is that it bears close watching.