DSG International - Dixons as was - says sales are booming. But people aren't flocking into Dixons because of the charm and efficiency of its staff. They're doing so because spending generally is picking up; the British Retail Consortium says sales grew 9.8% (doc*) in the year to April.
This chart shows one reason why sales should rise - the ratio of sales to house prices is at an all-time low.
This is not a quirk of the strong housing market. The ratio of sales to households' bank deposits is also at a record low, whilst the ratio of sales to share prices is below average. The overall sales-wealth ratio is therefore very low.
Why should this point to sales rising? Simple. Over time, wealth and spending should rise together - if they didn't, we'd all end up as either misers or bankrupts. So, when spending is a long way below wealth, spending should subsequently rise. It's like a drunk walking her dog home (pdf); the two might wander a long way from each other during the journey, but they end up in the same place.
Which raises the question: why, then, might sales not rise much? There are some mundane answers. People are using housing wealth as a form of pensions saving. The positive effects of the low sales-wealth ratio will be offset by rising unemployment, low wage inflation, and rising utility bills depressing spending.
But there's a more interesting possibility. Sales and wealth can converge not merely because sales rise, but because wealth falls. There's evidence from both the UK (pdf) and US (pdf) that the consumption-wealth ratio can predict equity returns. For example, high sales-house price ratios in 1970, 1982 and 1994 led to rising share prices, whilst low ratios in 1973, 1987 and 2001 led to falling prices.
This might reflect the wisdom of crowds. Consumers in aggregate. tacitly, see bad times coming and spend little (relative to their wealth) in anticipation.
The bottom line here is that either retail sales might be surprisingly strong, or share prices surprisingly weak. If I were into the judgment-futurology business, I'd say which.
* The link is to the document because news reports merely rehash the BRC's self-servingly downbeat gloss upon the report. 
hmm ... this is interesting, but I'm a little fuzzy on your point. If (big if) I'm reading your chart correctly it seems that consumption is low in relation to wealth. Wouldn't that predict falling asset prices?
Posted by: Chris | May 16, 2006 at 11:29 PM