Who Is Hitting the Shops?

3. Total Retail Sales of Consumer Goods: In the U.S., household consumption accounts for 70% of all economic activity. In China, the share of household spending in GDP is 35%, and moved in the wrong direction for most of the last decade. With China’s hard-pressed households preferring to stuff their cash under the mattress rather than spend it at the shops, investment and exports have been the main drivers of GDP growth. The government has recognized that this unbalanced growth model cannot be sustained forever. They want the domestic consumer to start spending more cash and to play a larger part in driving growth. The retail sales data is the best high-frequency guide to the strength of domestic consumption, but it also has problems:

• To most people, retail sales means spending by households at the shops. In China, this is only part of the story. The retail sales figure includes not just spending by households, but also spending by government departments and business-to-business sales. If the People’s Liberation Army (PLA) decides that March is a good time to buy new uniforms for each of its 2.3 million soldiers, it will mean a surge in spending on clothing. But unless the PLA decides spring camouflage colors simply will not do for summer, and uniforms need to be updated every season, it is not a surge that is likely to be sustained. The evidence suggests that government spending is countercyclical—spending when households are saving and saving when households are spending. The result is to smooth out fluctuations in the growth of retail sales.

• The process of urbanization and rising wages in China continues to increase the amount of retail sales. The NBS has said that urbanization adds about 1% growth to retail sales every year purely from more people moving to the city, earning more, and spending it at the shops. That growth is real, but it represents the playing out of an ongoing structural transition in the Chinese economy, not cyclical changes in household spending.

• The published figure is in nominal terms. Looking at the table on page 5, the nominal growth rate of retail sales in November 2010 was 18.7%. Taking account of a reading of 5.1% on the CPI in the same month, real growth was a less impressive 13.6%.

• Retail sales figures do not include spending on services. The increasing amount that households spend on haircuts, school fees, and medical expenses does not show up in the retail sales data.