In June, retail and food service sales in the U.S. economy declined 0.3% from May. When calculating these sales figures, the Census Bureau looks at 13 different kinds of businesses. In June, seven of those business types reported an outright decline in sales. (Source: U.S. Census Bureau, July 14,2015.) In particular, American consumers are pulling back on their spending of discretionary staple items such as furniture and clothing, building material, and garden equipment.
Going forward, economists and analysts are further pulling back on their estimates for U.S. consumer spending.
For example, according to the National Retail Federation (NRF), for the upcoming back-to-school shopping season, consumers are expected to spend $630.36 on average. In the previous year, they spent $669.28—a decline of six percent!
Matthew Shay, President and CEO of NRF, said, “Parents this summer will inventory their children’s school supplies and decide what is needed and what can be reused, which just makes good budgeting sense for families with growing children.” (Source: National Retail Federation, July 15, 2015.) In other words; parents would rather reuse whatever they have than buy something new.
Inventories Continue to Rise
But the most concerning trend is not the pullback on consumer spending; it’s the stockpile of goods that American businesses are accumulating.
In May, inventories at U.S. manufacturers increased 2.4% from the same period a year ago to $1.79 trillion, while sales were down 2.2% year-over year! (Source: U.S. Census Bureau, July 14, 2015.) The amount of inventory built up at U.S. businesses is now similar to the size of the entire Canadian economy!
As Goes Consumer Spending, So Goes the U.S. Economy?
A slight change in consumer spending can cause great havoc within the U.S. economy. The 0.3% decline in retail sales, the six percent decline in back-to-school shopping, and other consumer tightening should be taken very seriously. After all, consumer spending is two-thirds of U.S. gross domestic product (GDP).
Dear reader, over the past few months, we have heard that consumer confidence in the U.S. economy is increasing while gas prices are down. But this has given us the opposite effect; it resulted in consumer tightening. When we see inventories at U.S. manufacturers go up 2.4% while consumer spending pulls back 2.2%, it’s not a good thing. U.S. companies are already seeing the slack consumer demand hitting their profits.
For the second quarter of 2015, earnings of S&P 500 companies are expected to decline by 4.5% year-over-year. This will be the first decline in earnings since the third quarter of 2012 and the biggest since the third quarter of 2009! (Source: FactSet, June 26, 2015.) How can a stock market rise under these circumstances? It can’t.