Consumer Spending Broken

Consumer Spending BrokenHope springs eternal; many believe consumer spending will resume in 2012 as the jobs market improves, preventing the U.S. economy from entering a recession. But the hard evidence shows otherwise.

As the U.S. Senate and Congress are split between democrats and republicans, there are at least 15 job bills that have not been passed or that are still stalled, as the jobs market continues to deteriorate. (Source: LA Times, June 22, 2012.)

This stalemate is unlikely to resolve with the upcoming election so close. As the stalemate continues, 19.1% of college graduates under the age of 25 are in lower-paying jobs for which they are overqualified, while the overall youth unemployment rate in this country is 16.4%. (Source: USA Today, June 6, 2012.) These are the same graduates who are saddled with debt before they even enter the jobs market.

We can all agree that the prime working ages at which people buy homes, pay for children’s education, save for retirement and spend the most range from their 30s to their 60s.

As of May, 2012, there were 3.5 million people in this country between the ages of 45 and 64 who were unemployed, with a full 39% of them unemployed for more than one year. (Source: Wall Street Journal, June 23, 2012.) For as long as jobs market records have been kept, this level of unemployment among this group has never been this high.

It has been four years since the financial crisis began. The extraordinary length of time that the jobs market has experienced such sluggish growth means that more and more people have been forced to dip into their savings to survive and delay life-changing decisions like marriage and having children.

This has long-ranging effects on consumer spending and highlights how irresponsible it is not to introduce job bills that are necessary to help the jobs market get back on its feet. just released its financial security index. It works on the generally accepted rule that each person should have six months of expenses stored away as a cushion in case something unforeseen—like losing one’s job or a becoming sick—should befall someone.

It found that only 25% of Americans had put aside that amount, while 28% of Americans had no savings whatsoever. This again is reflective of a jobs market that is not producing good-paying jobs. This also reflects the strain on the average American, which is why something urgent must be done to get the jobs market started again.

Among retirees, only 41% had enough money put aside to cover six months of expenses. This is a staggeringly low number for a time in people’s lives when they should be more financially comfortable. This is also why so many more potential retirees are remaining in the jobs market: they need more money to live day to day. Consequently, it prevents the younger generation from taking the jobs the potential retirees are keeping, further straining the jobs market and consumer spending.

In light of all of these headwinds in the jobs market, it is odd that there are still those noting strong consumer spending…the same people who actually think the U.S. economy is improving.

In the meantime, dear reader, watch out for that stock market rally…it’s nearing its end.

Michael’s Personal Notes:

Many people have tuned out the European debt crisis and believe simply that another emergency meeting will be held in which nothing will be decided, allowing the eurozone to simply continue surviving as it has.

The problem with this line of thinking is that the unemployment rate and the economic recession continue to worsen in the eurozone, therefore prompting leaders to resolve the European debt crisis and get their citizens back to work instead of having them protest on the streets.

It is critical that something done very soon or there will be ramifications here in the U.S. as well. The eurozone could experience a banking crisis that will be worse than the Lehman crisis in 2008 and will lead to the European debt crisis reaching heights no one could ever imagine.

The best way to describe the situation is to use Portugal as an example. The debt and unemployment situation in Portugal is such that the country will most assuredly require another bailout from the eurozone.

Yet throughout this European debt crisis in 2012, there has been very little mention of Portugal. If its situation is just as bad as Spain’s, if not worse, then why hasn’t Portugal been in the headlines as the European debt crisis deepens?

The answer is that although Portugal will most likely require another bailout from the eurozone, the country does not need to roll its debt over until the first quarter of 2013. This is a very important concept to grasp, dear reader. It isn’t only the size of the debt that a nation carries that is critically important; when that debt matures and so needs to be rolled over counts as well.

The reason this is so important is that eurozone investors and investors holding bonds of countries like Greece, Spain and Italy have debt maturing this July, for example. Will investors paid the money from the eurozone, during the European debt crisis, be willing to reinvest their money in Spanish bonds? We all know the answer is a resounding “no.” These investors will take their money and pull out of the eurozone and be thankful their investments did not go to zero amidst the European debt crisis.

The estimates vary, but the 17 nations that make up the eurozone need to rollover roughly 800 billion euros in 2012. Obviously, Germany along with the Netherlands, Austria and other northern countries of Europe will be able to roll over their debt comfortably. The problem is that eurozone countries like Greece, Spain and Italy are seeing money flee out of their countries and so their interest rates rise on their debt as a consequence.

As investors flee the eurozone, and especially the more troubled countries, the Greek banks, Spanish banks and Italian banks still need money in order to meet their daily obligations and continue to keep their economies functioning. This is why the European debt crisis is escalating. This is why the prime minister of Spain is saying the country cannot function for much longer without a bailout.

If any of these eurozone banks go bankrupt, it will cause unforeseen effects even here in the U.S. The financial system is connected globally and U.S. banks have significant ties with the eurozone and the European debt crisis.

To what extent? Well, we are all going to find out if money is not provided to the banks in southern part of the eurozone. It is time to take the European debt crisis seriously.

Where the Market Stands; Where it’s Headed:

On Friday, rumors surfaced that the European Economic Union was taking measures to support the Italian and Spanish banks…and presto…the Dow Jones Industrial Average surged some 250 points.

This is very important, dear reader, as it signals that the stock market is reaching a top. When you have stock market that only trades higher on rumors of money printing, and moves lower on poor economic news and poor corporate earning, the market is treading water.

Who will benefit the most as world central banks print money to get us out of the next economic down leg? Long-term, it won’t be the stock market; it will be gold bullion (which, incidentally, was up $50.00 an ounce Friday on the news the European Union would support the Italian and Spanish bond markets—i.e. news of money printing).

What He Said:

“For the economy the message from retail stocks is quite clear: consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in Profit Confidential, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008