Good Stories Built on Terrible Logic

Rodney Johnson | Thursday, May 09, 2013 >>

We are all bad drivers near our homes… at least that’s how the story goes.

Statistically speaking, 80% of all accidents occur within two miles of the home, and it’s the driver’s fault. Obviously, we all become blind, inattentive drivers as we near our own driveways.

We know the streets so well and we are so familiar with landmarks that we fail to take basic precautions. We speed. We ignore stop signs. We start thinking about what’s for dinner, what new hole the dog dug, which little projects we can get done around the house before our favorite TV show starts.

It is the old adage: familiarity breeds contempt.

The problem is, this theory and its proof may sound reasonable when you consider just one piece of the puzzle… but when you start looking at other pieces, suddenly, this picture is all wrong.

That statistic of 80% is only part of the story…

It turns out that people do 90% of their driving within two miles of their homes. If only 80% of accidents are within that distance, then drivers are actually safer when closer to home.

With this additional information we can spin an entirely different story…

We pay more attention when we get closer to home because our kids are in the neighborhood. We know the landmarks so well that we recognize when something is out of place.

It’s amazing what we can rationalize when given just one simple piece of information. And how adding a new piece of information can take us in a whole different direction.

Take retail sales for instance.

The level of retail sales is at an all-time high. This is true.

The level of retail sales adjusted for inflation (called real retail sales) is also at an all-time high, having recently surpassed the 2007 high.

Using this information, pundits now claim we’re well on the long path to recovery.

This might seem obvious. If retail sales have improved that means consumers are driving the economy higher. If there was some sort of long-term decline occurring, wouldn’t this figure be decreasing?

Hmmm.

This sure sounds good, but it’s missing an important detail. It’s missing a measurement of the number of people involved.

While it’s true that the absolute dollar figure of sales has increased, it’s also true that the number of people in our economy has increased. When we account for the number of people by measuring real retail sales on a per capita basis, then the retail sales number has actually fallen.

It’s like measuring sales in a store, where the goal is to make sure that each customer spends more. If revenue is increasing, say from $1 million to $1.1 million (up 10%), then things look pretty good. But if the number of people shopping has increased from 30,000 to 40,000 (up 33%), then the spending per customer has actually fallen.

If I own a store where revenue is increasing, this might not be a problem. However, if my costs go up with every new client because my business is customer service driven, then this can lead to a drop in profits. It is the same with the U.S. economy.

A rise in retail sales is good, but if the sales per person is falling, then, on average, each of us has less.

And this is exactly where we are today.

But this might not be such a bad thing… Perhaps part of the reason real retail sales per capita aren’t reaching old highs is because consumers have chosen to lower credit card purchases.

Are these tied together? Maybe. Or maybe this has occurred because consumers don’t have as much average income, given the fall in real wages.

Either way, it’s a story of “less,” and one that is becoming common during this economic winter season.


Rodney

PUBLISHER’S NOTE: Harry sent you an urgent warning this morning about an announcement one of America’s largest retailers is set to make on August 1. What will be revealed will catch many people completely off-guard, potentially devastating the finances of thousands. If you’ve not yet reviewed Harry’s work, I urge you to do so now.

 

 

Ahead of the Curve with Adam O’Dell

A Technical Take on Fundamentals

Have I got an interesting chart for you today! But first, let’s get one thing cleared up right away: technical analysts, like me, DO care about fundamentals. We just look at them through a different lens, compared to how economists look at them. Rodney’s astute analysis of retail sales figures is a perfect example of this.

 

Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.