Capital Gains and Games

Stan,

Your instincts are right on.  Our incomes aren't growing very much, but prices are going up, particularly for energy and food, so consumers are shifting away from luxury goods and spending more at Wal-Mart for necessities.  This is an example of income effects being partially offset by price effects.  Consumers are shifting their consumption patterns to keep the highest possible standard of living in the face of slowing income growth.  In other words, consumers are getting squeezed.

Another way to see this is to examine retail sales. The latest Census Bureau report shows overall retail sales have declined slightly in February and March from what they were in January.  Looking at the detail shows auto sales declined the most.  Auto purchases are a mixture of luxury and necessity, but they're more postponable than basic necessities.  When income growth slows, consumers put off auto purchases if they can.

When U.S. consumers buy more at Wal-Mart, they are shifting a greater share of their consumption to goods manufactured in China as shown in the Economic Policy Insitute analysis.  EPI claims Wal-Mart's imports from China have cost 200,000 manufacturing jobs since 2001.

On November 16, 2004, PBS's Frontline examined the pros and cons of the Wal-Mart's increasing dominance of U.S. retail sales.   Duke University Sociology Professor Gary Gereffi concluded:

"Wal-Mart is both good for America and bad for America. The good side of Wal-Mart is that no other company has been able to deliver the kind of low prices on a continual basis that Wal-Mart has delivered for the U.S. consumer. And it's done so across a wide range of goods.

"Wal-Mart is bad for America because it's hurting jobs in the United States. It's hurting jobs in two ways. Wal-Mart is putting a lot of pressure on the jobs of its suppliers, who are finding that they can't meet Wal-Mart prices, so Wal-Mart goes offshore. Those suppliers go out of business.

"Wal-Mart is also having a negative impact on employment in the retail sector. Wal-Mart is the largest employer in the United States after the federal government. But Wal-Mart is also very well known for being a non-union company and pushing non-union conditions on its workforce. ... It pays its workers at a minimum pay scale with very few fringe benefits. Because Wal-Mart's the largest private employer in the United States, whatever Wal-Mart does in terms of the labor market, all other businesses have to follow. So Wal-Mart is really determining the direction in which the U.S. labor market is moving."

What we have here is a double-edged sword, we over invested in real estate and borrowed too much, and now we're starting to pay the price.  Most Americans are tightening their belts and are trying to pay down debt.  Our standard of living will stagnate until we cut our trade deficit and our fiscal deficit and start making more productive investments that create better jobs at home.

Pete