Posts Tagged ‘consumer spending’
If you follow the financial news, it feels like the stock market is moving higher and higher…a situation in which investors often feel they are missing out.
But the reality of the situation is very different. So far this year, almost eight full months in, the Dow Jones Industrial Average is up only three percent.
Would you buy stocks with the Dow Jones trading at 17,100, near a record-high price-to-earnings (P/E) multiple and a record-low dividend yield? I wouldn’t. Hence, the question changes from “Am I missing out?” to “Is it worth the risk?”
On Monday, the chief market strategist at BMO Capital Markets said, “Longer term we are in the camp that believes U.S. equities are the place to be. They are the most stable asset in the world.” (Source: “Bull market will charge higher for 15 more years says strategist,” Yahoo! Finance, August 18, 2014.)
The belief that “stocks are the place to be” has gone mainstream now. And that’s very dangerous.
The reality of the situation: (1) stocks are trading at very high historical levels when measured by the P/E multiple and dividend yield; (2) the Fed is stopping its money printing program; (3) investors are pulling money out of the stock market; (4) consumer spending is tumbling; (5) stock advisors have remained too bullish for too long; and (6) the chances of a 20% stock market correction are very high.
According to the Investment Company Institute (ICI), between April and June, mutual funds that invest in U.S. stock markets witnessed net withdrawals of $19.1 billion. While July’s monthly figures are not updated just yet, looking at … Read More
Wal-Mart Stores Inc. (NYSE/WMT) reported its operating income in its second quarter (ended July 31, 2014) declined by 2.4%. Its subsidiary, Sam’s Club (wholesale store), saw its operating income, after taking out fuel, decline by 10.2%. (Source: Wal-Mart Stores Inc., August 14, 2014.)
For its entire 2015 fiscal year, Wal-Mart now expects to earn in the range of $4.90 to $5.15 per share compared to its previous estimate of $5.10 to $5.45 per share.
The performance of Wal-Mart is very important to economists like me because the massive reach of Wal-Mart is a good indicator of consumer spending. Wal-Mart is the biggest private employer in the world, with a staff of approximately two million, and the largest retailer in the world. More than one hundred million people visit a Wal-Mart store weekly.
So when Wal-Mart comes out with soft earnings, it gives me a reason to be concerned about the direction of consumer spending. But that’s not the only thing I’m worried about in respect to the economy.
According to FactSet, of those major public retailers that have reported their second-quarter same-store sales, 46.8% of them have reported sales below estimates.
Retail sales are stagnant for the simple fact that consumer spending is getting very soft here in the fifth year of the so-called economic “recovery.”
Below is a chart of the widely followed University of Michigan Consumer Sentiment Index.
Chart courtesy of www.StockCharts.com
As you can see, consumer sentiment has tumbled to its lowest level … Read More
A few years ago, investors couldn’t get enough of Chinese stocks. This led to numerous frauds committed by crooks in China that has since tarnished the reputation and reliability of all Chinese companies, whether they’re legitimate or not, despite their operating in one of the top growth areas in the world.
While I’m not focused on Chinese stocks at this moment due to better trading opportunities in the domestic stock market, I monitor the country and remain convinced it’s still a key place to have some risk capital invested in. When the broader market understands this, I would expect renewed buying in Chinese stocks sometime in the future.
My view is that the country’s current leadership under President Xi Jinping, who assumed power in March 2013, has a vision to create a country of consumers, just like the United States; albeit, I doubt it will come close to what we see here with consumer spending driving 70% of gross domestic product (GDP) growth. In China, consumer spending drives about 30% of GDP so there’s work to do. In the second quarter, retail sales continued at a double-digit growth of 12.4% year-over-year.
The objective to cut the country’s dependence on exports and foreign investment makes sense. With a potential market in excess of one billion people, it’s the right move.
China may not be in the spotlight for investors now, but you cannot ignore the country. With the recent years of underperformance, I see great longer-term upside in Chinese stocks.
The Chinese economy is growing at well below the double-digit growth of the past, but comparatively, the growth is far superior … Read More
By no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.
I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.
Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.
I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.
The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.
But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.
I, for one, … Read More
Don’t buy into the notion that there’s economic growth in America!
We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)
As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.
Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)
And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.
The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.
But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.
Chart courtesy of www.StockCharts.com
If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?
From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.
Dear reader, the perfect … Read More
In the first quarter of 2014, Retail Metrics, a retail industry research firm, found U.S. retailers missed their corporate earnings estimates by the most since the year 2000!
As I have been writing, consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting.
Last month, the Thomson Reuters/University of Michigan’s consumer sentiment index declined three percent from a month earlier. It was 84.1 in April, and it declined to 81.8 in May. (Source: Reuters, May 16, 2014.)
But consumer confidence is just one leading indicator that suggests consumer spending will decline in the U.S. economy; the unemployment situation and wages suggest the same.
The worst kept secret on Wall Street is that the big U.S. retailers are in trouble. While stocks, in general, have held their own this year (up about one percent so far in 2014), the stock prices of retail stores have fallen sharply. The chart below is of the Dow Jones U.S. General Retailers Index. The chart clearly shows the stock price of big U.S. retailers are falling quickly, down more than seven percent in the first five months of this year.
Chart courtesy of www.StockCharts.com
The story that consumer spending suffered in the first quarter of this year because of bad weather doesn’t sit well with me—I simply don’t buy it. The U.S. economy contracted one percent in the first quarter of 2014, the first time our economy has experienced an “official” contraction since the first quarter of 2011 for the simple reason that consumers are tapped out; their incomes are not keeping up with inflation.
All … Read More
I keep hearing about the economy improving, but I keep asking, where? I ask because the facts continue to say otherwise.
The U.S. Bureau of Economic Analysis reports gross domestic product (GDP) came in at just 0.1% in the first quarter of 2014. To remind my readers, in the fourth quarter of 2013, U.S. GDP grew by 2.6%. (Source: U.S. Bureau of Economic Analysis, April 30, 2014.)
These GDP figures reaffirm what I have been saying for some time now: the U.S. economy is headed towards an economic slowdown, not growth.
All we need to do is look at our exports. Exports from the U.S. economy to the global economy collapsed in the first quarter of 2014, declining by 7.6%. That’s definitely not helping GDP.
The Baltic Dry Index (BDI), an indicator of how demand in the global economy looks, is in a sharp downtrend, as illustrated in the chart below.
And consumer spending is facing headwinds. I can see this in the amount of inventory businesses are stockpiling. In the first quarter of this year, private business inventories rose by $87.4 billion after increasing by $111.7 billion in the fourth quarter of 2013. Businesses increasing inventories suggests customers are buying less, as each business’ inventory isn’t turning over; it’s stockpiling. GDP cannot grow without consumer spending.
Finally, last Friday, we heard the “good news” that the U.S. economy added 288,000 jobs in April—the biggest increase since January 2012. But the underemployment rate, which includes people who have given up looking for work and people who have part-time jobs but want full-time jobs, stands … Read More
An economy is said to be technically in a recession when it experiences two consecutive quarters of negative gross domestic product (GDP) growth.
The biggest portion of the U.S. GDP calculation is consumer spending; then comes investments, government spending, and, finally, net of exports. By far, consumer spending is the biggest factor in calculating GDP. All you need is a slight decline in consumer spending for GDP to fall.
And as it stands, consumer spending in the U.S. economy is on the decline. In 2013, it accounted for nearly 70% of GDP, meaning that for every $1.00 increase in GDP, $0.70 was associated with consumer spending.
Since November, consumer spending for durable goods (goods that can last for a long time, like a T.V. or furniture) declined by 3.23%. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 22, 2014.)
When we look at sales at retailers in the U.S. economy, they keep telling the same story: U.S. consumers are tapped out. Of 175 retailers tracked by FactSet, more than half of them have reported store sales in the fourth quarter of 2013 that were below market expectations. (Source: FactSet, April 11, 2014.)
So far, for the first quarter of 2014, 20 of the major retailers have provided negative guidance regarding their sales and only nine have issued positive guidance. For the entire 2014 year, 31 retailers have issued negative guidance about their sales and only 15 have issued positive guidance. (Source: Ibid.)
There is a clear sign of declining retail sales. In 2011, same-store sales grew by 2.9%; in 2012, they increased by 2.6%; … Read More
The International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)
I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.
Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.
Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.
The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)
Adding to the misery, most economic hubs are telling the same tale.
The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More
In 2013, consumer spending accounted for 67% of U.S. gross domestic product. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 2, 2014.) It’s plain and simple: economic growth cannot be achieved unless consumers are spending.
And unfortunately, higher prices and lower discretionary spending are putting the brakes on consumer spending here in 2014.
The Motion Picture Association of America says box office sales in the U.S. economy came in at $10.9 billion in 2013—up only one percent from 2012 and up just three percent from 2009. But here comes the kicker: the sales increase was due to higher ticket prices. The number of tickets sold for Hollywood movies in 2013 was down 1.5% from 2012 and six percent from 2009! (Source: Motion Picture Association of America, Inc., March 25, 2014.)
And the U.S. housing market is getting into trouble, too, as consumer spending pulls back. The chart below is of new-home sales in the U.S. economy from the spring of 2012 until now.
You will quickly see from the chart that new-home sales in the U.S. economy peaked in late 2012/early 2013 and have come down since. Existing-home sales are also under stress and well below their post-Credit Crisis peak.
Why does the housing market matter? When homebuyers move into their new homes, they buy things like lawnmowers, appliances, furniture, and more. With home sales declining, it suggests consumer spending on these items will not be robust in 2014.
Dear reader, consumer spending patterns in the U.S. economy show troubling trends in the making. Sure, I talked today about how movie tickets … Read More
The stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.
Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!
As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.
Chart courtesy of www.StockCharts.com
And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.
I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.
Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More
Consumer spending in the U.S. economy is highly correlated to consumer confidence. If consumers are worried about the economy, they pull back on their spending.
The Conference Board Consumer Confidence Index decreased by 1.63% in February from January. (Source: Conference Board, February 25, 2014.) And we see the corresponding pullback on consumer spending in weak U.S. retail sales.
Macy’s, Inc. (NYSE/M) reported a decline of 1.6% in revenue in its latest quarter—which includes the holiday season. For its just-completed fiscal year, company revenues were up by only 0.9%. (Source: Macy’s, Inc., February 25, 2014.)
Sears Holdings Corporation (NASDAQ/SHLD) reported a decline of 12.6% in revenues in its latest quarter. Yes, I know this company is having problems; but a drop in revenue of 12.6% for a retail giant like this—and during the holiday shopping season—is an indicator that consumer spending is very weak. (Source: Sears Holdings Corporation, February 27, 2014.)
Target Corporation (NYSE/TGT) reported revenues fell by 3.8% in its last fiscal quarter. (Source: Target Corporation, February 26, 2014.)
Best Buy Co., Inc. (NYSE/BBY) is in a very similar situation. The company reported a decline of more than three percent in revenues for its latest quarter. And for the 12 months ended February 1, 2014, Best Buy’s revenues fell 3.4%. (Source: Best Buy Co., Inc., February 27, 2014.)
The retailers I just mentioned are just a few of the many retailers that reported a decline in their revenues in the last quarter of 2013, which suggests consumer spending is in troubling territory.
My point is that those companies that are closest to consumer spending—the big American retailers—are giving us a … Read More
In the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)
But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.
Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)
This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.
The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.
Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More
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