Retail Sales Rose 1% in January, Now Back to Reality

Retail sales increased 1% in January on a M-O-M basis. This is the first increase we have seen in this measure in seven months. However, there is still little room for optimism as unemployment rates continue to soar and the stimulus plan becomes more watered down, and in our opinion less effective with each iteration. It seems evident that consumer activity and more specifically the marginal propensity to consume will remain at depressed levels through most of 2009 despite the efforts of the public sector to provide a stimulus to the economy. Politics as usual (Republicans focused on tax cuts, Democrats focused on spending, when in reality it should be an effective combination of permanent tax cuts, strategic spending initiatives, and continued use of non-traditional monetary policy) have adversely affected the stimulus plan and in turn left us with a package that is too small and feeble to address the massive output gap and effectively stimulate economic activity.