We all know the Federal Reserve increased the money supply by trillions of dollars in its effort to boost consumer spending after the credit crisis hit in 2008. Sadly, I feel like the entire stimulus was given to Wall Street on a silver platter, leaving the average American Joe to suffer.
Can you believe that, five years after the credit crisis hit, consumer confidence still hasn’t returned to where it was during the crisis? The Conference Board just reported an up-tick in its Consumer Confidence Index. The Consumer Confidence Index rose to 73.7 in November from 73.1 in October. It was 76.4 in February of 2008—during the crisis. (Source: Conference Board, November 27, 2012.) The index is based on a survey about how optimistic and pessimistic consumers are about current and future economic conditions.
Trillions of dollars thrown at the economy, and we can’t get consumer confidence going? To reiterate, consumer spending goes up when consumer confidence increases. In the United States, consumer spending makes up 70% of the gross domestic product (GDP).
Why is it so difficult to get consumer confidence and ensuing consumer spending to rise? Unfortunately, there are underlying issues that will continue to be obstacles to rising consumer spending.
According to the survey conducted by the Conference Board, 31.5% of respondents still believe business conditions are bad. 38.8% continue to hold on to the view that jobs are difficult to get in the U.S. economy.
The bottom line is that consumer spending can only increase if consumers have money to spend.
But real personal disposable income in America has been decreasing. It fell again in October, this time by 0.1%. (Source: Bureau of Economic Analysis, November 30, 2012.) Since July, real disposable income has fallen about 0.4%. (Source: Federal Reserve Bank of St. Louis, November 30, 2012.) And the savings rate is collapsing again. Since July, the personal savings rate for Americans has decreased almost 13.0%.
Years ago, when the financial crisis hit, I wrote that, historically, it has been consumer spending that has taken us out of recessions. I said this time that, because Americans were hit so hard by the bust, it would take years for consumer spending to come back. That opinion has changed.
But with so much negativity amongst consumers—with 1) their real personal disposable incomes declining; 2) their savings deteriorating; 3) corporate earnings growth deteriorating; and 4) rapid inflation knocking at the door—my concern moves from worrying about when consumer spending will come back to when the next recession will start.
It looks like 2013 will be a very challenging year for the American economy.
Michael’s Personal Notes:
Nowadays, the fiscal cliff is the topic of discussion regarding the U.S. economy. Seems every one I talk to or listen to is worried about the possibility of the U.S. economy falling off the fiscal cliff.
The concerns are legitimate. In the end, the White House and Congress will flip flop; they’ll argue and blame each other for supporting the wrong side of the economic ideology, but will eventually come to a decision. If they don’t, the U.S. economy will see a recession. I’m certain they don’t want that to happen. They know the U.S. economy cannot bear another recession.
The debt ceiling is a perfect example of the White House and Congress eventually working together. Since 1960, Congress has raised the debt limit in the U.S. economy 78 times—49 times under a Republican president and 29 times under a Democratic president. (Source: U.S. Department of the Treasury web site, last accessed December 4, 2012.)
Every time the debt ceiling issue comes up, there is speculation about the U.S. economy facing turmoil, but eventually, the decision is made to raise it. Thanks to the government, our national debt has increased more than 77% over the last five years—$9.2 trillion at the start of 2008, and edging closer to $16.4 trillion now. (Source: Treasury Direct web site, last accessed December 4, 2012.) The moral of the story is that government officials must come to a consensus and make a decision even if it is wrong.
I won’t be surprised to see the wrong decisions made in an effort to avert the now-infamous fiscal cliff. My worry, regardless of the fiscal cliff, is the U.S. economy falling back into a recession.
There are significant pressures building that can eventually lead the U.S. economy back toward recession territory. We are seeing corporate earnings growth decline, and the current quarter is not looking good for corporate America. The eurozone crisis is not going away anytime soon. China’s economy has also slowed.
To add to the worries, manufacturing activity in the U.S. economy is decreasing again. The Purchasing Managers’ Index (PMI) showed a decrease of 2.2% in November from October. The November PMI reading was the lowest since July 2009! (Source: Institute for Supply Management, December 3, 2012.) In four of the last six months, the manufacturing base has contracted in the U.S. economy.
Dear reader; the U.S. economy cannot see another economic downturn. It simply can’t handle it, as the suffering of Americans will worsen. Think unemployment is a problem now? Or food stamp usage is out of control? Another recession will collapse consumer spending and put Americans over the edge.
As I wrote earlier this week, for the first time in three years, corporate earnings growth in America turned negative in the third quarter of 2012. (See “First Time in 11 Quarters; Corporate Earnings Growth Turns Negative.”) Whenever this has happened in the past, a recession has followed. The chance of a new recession starting in 2013, while not really talked about much, is a real concern to this economist.
Where the Market Stands; Where It’s Headed:
The Dow Jones Industrial Average continues to flirt with the 13,000 level. The traditional Christmas rally has thrown the market a bone here and there. In the backdrop, my analysis is showing that the smart money is getting out of Apple Inc.(NYSE/AAPL) stock and other widely held stocks.
For this January, I don’t see the stock market experiencing the January rally it has experienced in each of the three past years. The Dow Jones Industrial Average rallied in January of 2010, 2011, and 2012, setting the tone for the remainder of each year. I don’t see that happening in 2013. I expect 2013 to be a turning point for the markets.
What He Said:
“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in Profit Confidential, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.