Weekend Contemplation #1 – Is the Consumer Out of Steam?
The excerpts below are from a Market Watch article that discusses whether or not the consumer is out of steam. The entire article maybe of interest to some because it addresses individual retailers.
Shoppers have already adjusted their spending to accommodate climbing energy prices and interest rates, but the housing slump and problems obtaining and affording credit are proving too tough to juggle for many, according to some of the nation's largest retailers, who are bracing for a tough second half of the year.
"Consumer spending has been moving ahead at reasonably healthy rates in the past couple of months, but this latest drop in confidence will likely take some wind out of the consumer's sails at the end of the third quarter and in the fourth quarter," Brian Bethune, Global Insight's economist, told MarketWatch on Friday.
On Friday, the widely watched index of consumers sentiment about the economy conducted by the University of Michigan and Reuters posted a sharp drop to 83.3 from 90.4 in July.
Wal-Mart Chief Executive Lee Scott, speaking on a recorded earnings call, said many of his customers are living paycheck to paycheck.
Merrill Lynch Chief Economist David Rosenberg has become so bearish that he believes that the trouble already is at hand.
"There are plenty of signs now suggesting that we may be in the early stages of a consumer-led recession for the first time in 17 years," he said in a research report this week.
Yes, he said, there's the volatility rocking the stock market, but there's also a "massive" pullback in mortgage lending, hedge fund problems, the Federal Reserve's infusion of liquidity and the "sharp retrenchment in risk appetite."
"While the turmoil on Wall Street is an understandable distraction, the future is very likely in the hands of the consumer on Main Street USA and the latest signposts are not encouraging," he added.
Not everyone is ready to write off consumers just yet. Art Hogan, Jefferies & Co.'s chief market strategist, concedes that the macro economic landscape isn't pretty, but said spending won't stop.
"History has proven out that betting against the U.S. consumer is the wrong bet," he said.
High-income shoppers appear mostly unfazed by all the events so far, although some industry observers worry that the deterioration in the stock market could take its toll on them too as they watch their wealth dwindle.
Mike Ullman, chief executive at J.C. Penney Co. isn't worried about spending as much as he is about consumer psychology. "Sentiment is the thing that cuts across multiple sectors and affects everybody's attitudes," he said.
Auto sales, Rosenberg noted, have fallen for a record seven months in a role and slipped to a nine-year low of 15.2 million units in July "and there is no sign of a pick up in the first half of August," he said. And sales of new and existing homes are also at multiyear lows.
If more spending dries up, recession fears will swell.
"I'm nervous," said Standard & Poor's Chief Economist David Wyss. "The odds of a recession have increased. The danger is that these kinds of financial panics can be self fulfilling."
Mike Niemira, chief economist for the International Council of Shopping Centers, said it's not a traditional recession that's at work right now, but a growth recession. The growth of consumer spending has slowed considerably from its 5% gains two years ago to what could be a 2.5% gain, at the high end, by the end of the year.
"We've been in slow-growth mode for a year," he said.
That that means, according to Scott Hoyt, director of consumer economics at Moody's Economy.com, is that the consumer can no longer shoulder the burden of the economy alone.
"As long as they've got jobs and their incomes are growing, there will be enough spending growth to keep the economy moving," he said. "But we're looking at investment income and foreign trade as being more the leaders of economic growth now rather than consumers."
While many argue that the slow down in consumer spending was hardly unexpected and the evidence so far -- soft sales in building materials, furniture and home furnishings -- is mostly tied to the housing market, momentum is what is critical.
GDPI has been declining for the last year and net exports are too small to significantly effect real GDP. PCE and GDPI comprise 87.5% of GDP (double click on image below to enlarge).
"All of this can feed upon itself and ultimately give us a recession," Niemira said. "That's the worry today."
But by Jefferies strategist Hogan's thinking the slow down in consumer spending isn't nearly enough to push the U.S. economy into a recession.
"There is a Chicken Little crowd as it pertains to consumer spending," he said, referring to those doomsayers who believe the sky is falling. "Once in awhile they're going to be right. I think they've correctly predicted two out of the last 25 setbacks."
My response to all these differing opinions is - that is why they invented horse racing. How much of your money do you want to bet on your opinion? If the answer is none - then your just another person with an opinion.