A Study You Should Know About

unemployment rateWhile most other economists tell us otherwise, I’ve been writing this year about how the numbers so far do not point to a U.S. economic recovery, but rather to a continued economic slowdown, with the threat of recession.

I’ve been focused on the average damaged consumer, who has lost value in his/her home and has been restrained by no income growth…if he/she is lucky enough to have a job. With over 47 million Americans on food stamps, I’m at a loss as to understanding how consumer spending can grow with this backdrop.

Interestingly enough, a major new study by the Federal Reserve Bank of Chicago has come to the same conclusion. The study points to a survey about the habits of consumer spending over the next two years, and the results are not encouraging for U.S. economic recovery.

The study points to the fact that 2008-09 saw the worst year-over-year decline in consumer spending in the U.S. since—that is 65 years ago. Worse, all subcomponents of consumer spending declined, including durable goods like cars, furniture and other items a consumer purchases for many years, and even food.

While the researchers are quick to point out that more people may have eaten at home, which explains lower food consumption, I’m certain that some of that decline in food consumption can be explained by the dramatic rise in food stamp usage.

 The report goes on to note that after 2009 to today, the recovery in consumer spending has been uncharacteristically weak. While most recessions needed usually one year for consumer spending to return to previous highs, this one took three years!

 The researchers noted that the steep decline in income growth bears a large part of the blame (the balance borne by the drop in home prices). Not only was the fall in income growth the worst on record, but also incomes have still not recovered from pre-recession levels! (Also see: Personal Income Growth in America Now Only a Memory.) How can we expect consumer spending to increase against this economic backdrop?

 The economic numbers released to date, when analyzed by serious economists, point to the same forecasts I have been making: the U.S. will experience low growth in both personal income and consumer spending over the next two years.

 So while some are saying the U.S. economic recovery is in place, the Federal Reserve Bank of Chicago itself is telling a different story. Watch out for that rise in equities this year. It’s looking more and more like a bear trap.

 Michael’s Personal Notes:

What the world’s largest retailer and the world’s largest food maker are telling us about the economy…

 Yesterday, Wal-Mart Stores, Inc. (NYSE/WMT) reported its quarterly earnings, missing Wall Street estimates because its price-cutting strategy reduced margins. Wal-Mart’s typical customer is the low-income shopper, who is not exhibiting much consumer confidence right now.

Wal-Mart is focused on reducing its costs, like pulling more greeters from the entrances. This is because the company does not see an ability to raise its prices in 2012, as consumer confidence struggles. With the unemployment rate high, job security uncertain, and food and energy costs rising, consumer confidence is nowhere to be found.

 The challenge becomes maintaining and/or lowering customer prices while Wal-Mart’s input costs rise as the cost of commodities rises. The company hopes that commodity prices will remain relatively stable in 2012. However, if central banks around the world continue to print, this may not be possible.

Nestle SA (Pink Sheets/NSRGY) is also cautious on 2012 after missing profit margin estimates in 2011. The world’s largest food maker noted that economic uncertainties due to high unemployment rates resulted in waning consumer confidence. This is challenging the company’s ability to raise its prices to customers.

 It’s not just the leaders in these spaces that are struggling with the same issues, but the smaller companies as well.

 General Mills, Inc. (NYSE/GIS) cut its profit forecast for 2012 amid weak demand—weak consumer confidence—and rising commodity costs, which are squeezing profits. The Company cited weak demand across the board in the U.S. as a result of lower consumer confidence and demand. One of the reasons General Mills cited for soft demand was the high unemployment rate.

 The J.M. Smucker Company (NYSE/SJM) reduced its full-year 2012 profit forecast due to—wait for it—lower consumer confidence and demand. The company also noted that the increase in commodity prices and the inability to pass that on to consumers, who are struggling right now with a high unemployment rate, are squeezing its margins.

 The general theme above, dear reader, is one of weak consumer confidence, rising commodity costs, and inflation. Even Wal-Mart noted that consumers are worried about rising food costs and rising energy prices.

 The typical consumer is frugal, because the consumer is struggling. (Also see: Consumer Debt Growing Again; This Time Not by Choice.) These companies are telling us as much and their financial results are a reflection of falling consumer confidence and demand. Remember, 70% of U.S. GDP is consumer spending. While our politicians might tell us different, 2012 is shaping up to be a very weak year for the economy.

 Where the Market Stands; Where it’s Headed:

 On March 9, 2009, when the Dow Jones Industrial Average hit a 12-year low of 6,440, a bear market rally in stocks was born. The purpose of a bear market rally is to lure investors back into the stock market.

 Politicians are telling us that the economy is improving; statistics are telling us that the economy is improving. Investors are feeling good again (it took three years) and, presto, the Dow Jones Industrial Average is back at 13,000.

 But, as I point out in my lead article today, the reason the stock market has doubled in the past three years has very little to do with an economic turnaround. It has everything to do with artificially low interest rates, critically high debt levels, and an unprecedented increase in the money supply. The simplest way to present this: money printing has fueled the market rally.

 To sustain a real bull market, the economy needs to grow. That’s plainly not happening and that’s why I believe all we are experiencing is a sucker’s rally in the stock market.

 What He Said:

 “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.