Diane Coyle: The shops might say the tills aren't ringing but that doesn't mean rates won't be rising

What crisis? America is pushing the right buttons for growth
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The Independent Online

Is anything more heartwarming than the traditions of the Christmas season? The rowdy parties, the indigestion, the desperate last-minute hunt for presents - and, yes, the annual complaints from retailers about what a terrible Christmas it is on Britain's high streets.

The stores are right to be obsessed about their sales figures at this time of year. Retailing is seasonal, and about a fifth of all the money taken passes through the tills in the few weeks before Christmas, dropping to next-to-nothing by late January. This also makes it difficult to interpret the figures, as the accident of the day on which 25 December falls can shift spending substantially from one week to another or even one month to another.

Still, on the face of it, retailers have some cause for concern this year. The British Retail Consortium (BRC) reported a tough November, headlining a small decline in sales compared with the same month the previous year and speaking of a "subdued, cautious mood among consumers" - while admitting that it was too early to panic.

However, the BRC focuses on the "like-for-like" measure of sales. It surveys some 80 of the biggest retailers about their total sales value - but also the value adjusted for their expansion of floor space. Whenever retailers are expanding - as they have been for years - this measure is an underestimate of the actual growth in their turnover.

In fact, in the same month that like-for-like sales fell by 0.2 per cent year on year, the total rose by 2.4 per cent. Still, this was a marked slowdown on the growth rate in the total earlier in 2004, so perhaps some gloom is still warranted.

Well, perhaps. But on the other hand, the retailers' own survey has shown growth running well below the figure indicated by official statistics all year. The two indicators never move all that closely in tandem. The official figures survey 5,000 retailers, of all sizes, and therefore simply give a more accurate picture overall.

What's more, the official statistics include all the internet and mail- order sales of those retailers. And all the signs are that this has been a bumper Christmas for online stores. Without giving away too many secrets to my own family and friends, I am part of the reason why John Lewis Direct reported online sales up more than 100 per cent (on a like-for-like basis) while sales at its physical stores were actually down 4.2 per cent. Figures from Hitwise, which monitors website traffic, showed record numbers at online retail sites in the first week of December.

The official figures for the volume of retail sales did show a marked slowdown between the first half of 2004 and the autumn. On the other hand, the November figures out during the past week show a partial recovery, with growth in the past three months compared to a year earlier accelerating to 6.4 per cent.

The most rapid gains were in clothing stores and other non-food retailers - those complaining the loudest about what a bad Christmas they're having. According to the BRC, the same month was "difficult" for electrical retailers, while in clothing only handbags with fur trimmings, and other accessories, were strong.

It's important to resolve the paradox because the strength of consumer spending is one of the issues of concern to the Bank of England's Monetary Policy Committee (MPC). One analysis of the economy says spending on the high street is weak, the housing market is on the verge of a crash, inflation is low - why on earth would anybody think interest rates might need to rise again?

There is another interpretation, though. Retail sales volumes are growing robustly on the reliable official measure. The housing market is certainly cooling off but it's showing no signs of a dramatic crash. Employment is high and the labour market is so tight that, according to figures out this past week, average earnings growth (excluding bonuses) is up to 4.5 per cent, its highest for three years.

The conclusion for interest rates on this more upbeat view is not clear-cut. Although retail sales volumes have risen by 6.4 per cent year-on-year, sales values are up 4.2 per cent, implying price cuts on the high street. Here, then, is the explanation for retailers' gloom: they're having to reduce prices to drive sales, in large part because they have over-expanded their floor space in recent times. The gap shown on the chart between the BRC's like-for-like and total sales measures in 2004 is an indicator of this over-expansion.

So competitive pressures mean consumers are seeing no price rises or continuing falls on many goods, But that does not mean the MPC need not worry about inflationary pressures. In plenty of services, prices are rising rapidly. Both the MPC's target measure of inflation, the consumer price index, and its old retail price-based target, have picked up recently - as the second chart shows.

What's more, further back in the pipeline are other inflationary pressures. Oil and commodity prices are sharply up on a year ago, and prices charged by manufacturers are climbing. So are those in some non-high-street sectors - travel and energy bills because of the higher oil price, but also holidays and foods. In addition, the weaker pound is contributing to higher import prices.

In sum, the next few rate decisions will not be no-brainers. But the retailers should cheer up: with five more shopping days to Christmas, there's still plenty of money to be teased out of Britain's consumers.

What crisis? America is pushing the right buttons for growth

With all the focus on what's going wrong with the US economy - the plunging dollar, and the huge current account and government deficits - it would be easy to overlook what's going right. And according to new research published by the New York Federal Reserve Bank, that's the continuing productivity miracle.

The economists whose work is regarded as definitive in measuring the impact of computers on US productivity growth - Dale Jorgensen, Mun Ho and Kevin Stiroh - have actually revised their estimates of the long-term trend upwards.

They now estimate, using the most recent figures, that trend labour productivity growth is 2.6 per cent a year, compared with their earlier estimate of 2.2 per cent. Trend growth in American GDP is put at 3.3 per cent as a result - or as much as 4 per cent on the most optimistic scenario.

There is good reason to have confidence in the idea that the potential of the US economy has improved. After all, faster productivity growth rates have now been sustained since 1995. This includes a recession - the stage of the business cycle which usually sees absolute declines in productivity.

This time round, though, not only were there no falls in the ratio of output to employees, but the measure actually continued to rise fairly rapidly. This is unique in modern times.

To some extent, the reason is the obvious one: it's all because of computers and associated technologies. The decline in the price of computer processing power and telecommunications has been so dramatic that US businesses have reacted totally rationally by buying a lot more of these technologies. Part of the explanation for the economic "miracle" is the non-miraculous fact that there has been much higher investment in IT: put more resources in (because they're cheaper) and you get more output out.

However, another aspect of the explanation is more mysterious. Economists call it "total factor productivity growth" - jargon for how much more effectively businesses use the inputs that they have available. Part of it is technological innovation, but a more important part is organisational innovation and management of the economy. How do companies use all those new computers? How easily can workers move from one sector to another and retrain if they have to? How competitive is the economy, forcing firms to become more efficient?

It's on these fronts, rather than just plugging in new computers, that the US economy still scores the highest.

diane@enlightenmenteconomics.com

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