Consumer Spending on the Brink of Collapse?

Consumer spending is crucial for any economic recovery. When consumers spend, companies make more money, and from there, we get economic growth—more sales result in more jobs, higher wages, and, eventually, better living conditions for Americans.

In the current, so-called economic recovery, rising consumer spending is missing—this has to change before we can see any real growth in the U.S. economy. With that said, I have to ask: how can consumer spending pick up when consumers are struggling financially?

Retail sales, a measure for consumer spending in the U.S. economy, decreased 0.3% in October 2012 compared to the prior month. (Source: U.S. Census Bureau, November 14, 2012.) It could increase for November, and it probably will, because Christmas is around the corner.

The days following Black Friday showed consumer retail sales jumped several percentage points from last year. And while some analysts say this means consumer spending is increasing, to me, increasing sales over the Black Friday weekend mean consumers are hunting for deals, as they watch their holiday spending budgets.

Consumers are losing trust in the U.S. economy. Proof: the Consumer Sentiment Index, tracked by Thomson Reuters/University of Michigan, dropped to 74.5 in the beginning of December—the lowest level since August. In November, the index was at 82.7. (Source: Reuters, December 7, 2012.) The Consumer Sentiment Index tracks consumers’ mood when it comes to spending.

Add to the falling consumer sentiment the fact that the value of their money is declining, and we have a big problem. Since late July of this year, the U.S. dollar has declined in value against a basket of other major world currencies by more than 4.5%. Forget the official government statistics, like the Consumer Price Index (CPI). Consumers are stuck with paying more for their basic needs while their real disposable income is declining.

If consumer spending is to be an indication of a possible economic recovery, economic growth in the U.S. economy is looking grim.

We all know consumer spending affects American corporate earnings, which eventually catch up with public company stock prices. If consumers pull back on spending more than usual after this Christmas, which I believe they will, businesses that are not efficiently run will be stuck with excess inventories, see their sales decline, and, ultimately, their earnings will become the victim. I believe 2013 will be a trying year for many companies in respect to corporate earnings growth.

Where the Market Stands; Where It’s Headed:

I want my readers to remember a date for a long, long time. That date is December 12, 2012, also known as 12/12/12. It will take mankind 89 years to see a time when the day, month and year have the same numbers. On January 1, 2101, the numeric date will be 01/01/01.

Now, I’m not superstitious (okay, maybe a little). But I have to tell you that something very important, a turning point, occurred on 12/12/12. On that date, only two days ago, the Federal Reserve announced what many believe was “QE4,” a fourth round of quantitative easing. Starting in January, the Fed will start to buy an additional $45.0 billion a month in U.S. Treasuries. This is on top of the $40.0 billion a month it is buying in mortgage-backed securities.

And what did the market do when the Fed announced billions more in quantitative easing? The stock market went down. In each of the previous cases, the stock market rallied on each announcement of QE1, QE2, and QE3, albeit at a declining pace.

With the stock market declining on QE4, the market is giving a signal…a signal that money printing is no longer working; that its risks have reached the point where they outweigh its benefits. Indeed, 12/12/12 was a turning point for the economy and the stock market.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in Profit Confidential, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had realized.