Consumer spending in Germany is basically weak.

The real story about German retail sales is not the fact that January 2007 sales were down more than expected. The decline is the obvious result of the increase in Germany's Value Added Tax (VAT), which went from 16 percent to 19 percent as of January 1, 2007.

The decline in retail sales is clearly shown in the graph above-both for December 2006 and January 2007.

That the VAT increase is not the real story is underscored by German's recent retail sales history. The January 1, 2007 date has been known for months, and much of the reporting on consumer spending during the last months of 2006 had to do with the surprise that consumers were not spending at a higher level to be sure of fitting their purchases into the lower tax structure.

The BBC News service reported on January 31, 2007 that retail sales during December 2006 posted a "sharper-than-expected rise." Forecasters said retail sales would grow 1.3 percent. Instead retail sales gained 2.4 percent, a significant difference. The obvious conclusion here is that consumers waited longer than expected to lock in lower overall prices. And the steeper than expected decline in January 2007 meant that the degree to which the retail market was oversold was intensified for January 2007.

No, the real story about German retail is told by the light blue trend line in the graph on page 1. It slopes sharply downward, and because the period of the graph is 25 months, it is further obvious that the retail sales slump has less to do with the VAT and more to do with the longer term position of the country's consumers.

One of the more cutting problems has to do with Germany's employment picture. In fact, while still high, the country's unemployment rate has been dropping. The International Monetary Fund (IMF) shows the German unemployment rate at 7.7 percent at 2002. In 2003 the unemployment rate rose to 8.8 percent, and by 2004 unemployment began flirting with double digits at 9.2 percent.

Basically, unemployment stayed at that level in 2005 (9.1 percent), and then unemployment dropped to 8.0 percent in 2006. The decline in the rate of unemployment was not exactly momentous, but it was noticeable, and it did provide a measure of encouragement for the country's consumers.

The IMF estimates that employment for the full year 2007 will decline grudgingly to 7.8 percent.

There are jobs in Germany. The situation is improving. But wages are not keeping pace with economic expansion. The BBC says, "The problem facing many Germans is that even though demand for exports has helped to drive production and corporate profits, wage growth has been limited. As a result, consumer spending has failed to pick up as quickly."

And, according to the IMF, the economic expansion that pushed GDP growth to 2.0 percent in 2006 will experience a decline in 2007 with GDP growth expected to be 1.3 percent-and this estimate came well before the recent, highly publicized global stock market retreats.

Noting that consumer price increases in January 2007 were mild in spite of the VAT rise, a March 2, 2007 Agence France-Presse (AFP) story said that nevertheless, "There is an underlying weakness in consumption," as amply illustrated in the graph on page 1.

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