Not only did May 2012’s retail sales, month-over-month, decline 0.2%, but this was on the back of April’s retail sales numbers being revised downward from a decline of 0.2%. If this weren’t bad enough, the Commerce Department revised March’s 0.7% growth in retail sales downward to just 0.4% in growth!
So much for consumer spending, which represents 70% of gross domestic product (GDP) in this country, by the way.
These downward revisions simply highlight how quickly an economic slowdown is taking hold in the U.S.
Gas prices have come down at the pump over the past two months, which should have spurred consumer spending. While consumers are certainly grateful to pay lower gas prices, the extra money in their pockets is not translating into consumer spending.
The fact that last month was weak for retail sales in the U.S. and April’s retail sales were revised downward should come as no surprise to Profit Confidential readers. As I have been writing, personal real incomes in the U.S. have been falling, which means consumers’ wealth is not increasing. If consumers don’t have more money in their pockets, there can be no increase in consumer spending.
Eight of the 13 major categories of consumer spending decreased in the month of May. When car sales are removed from the retail sales numbers, the drop in consumer spending can be seen as the largest in two years!
Weak consumer spending is having a knock-off effect on other parts of the U.S. economy. If businesses are selling less, then it stands to reason they will have more inventory on hand. The Commerce Department reported that business inventory increased more than expected in May, as weaker consumer spending meant more product remained on the shelves.
Since the financial crisis hit in 2008, businesses have remained very cautious. They have done a very good job at not carrying too much inventory on hand, which is smart and prudent. However, the increased inventory now point to an economic slowdown taking hold here in the U.S.
It’s a catch-22 situation. If businesses have more inventory on hand, then they don’t need to order more products. If they don’t order more products from U.S. manufacturers or from other countries, then that slows down U.S. manufacturing and imports into this country. This pressures GDP growth and increases the pace of the economic slowdown.
The bottom line is that real income growth will not rise anytime soon in this country. Increased consumer spending will not materialize. The economic slowdown will not let up. America will fall victim to the after-effects of the original 2008 financial crisis, the current crisis in the eurozone and the slowdown in China. (See: U.S. Exports to Europe and China Collapsing.)
A few weeks ago, members of the Swiss parliament discussed introducing a gold bullion-backed currency to trade alongside their paper-based currency (source: Forex Pros, May 22, 2012).
In Switzerland, the official currency is the Swiss franc. What was proposed was a gold franc that would be backed by gold bullion. It would initially be circulated in Switzerland, with a fixed exchange of one gold franc containing 0.1 grams of gold bullion for five Swiss francs.
This proposal was initiated by the country’s largest elected party, the Swiss People’s Party. The party initiated the proposal because it felt gold bullion could play a role—as it has in history—in protecting the Swiss currency from debasement.
This is parallel to another role gold bullion has played throughout history: to preserve wealth. Gold bullion maintains purchasing power and value not only for an individual, but also for a country, as the Swiss are alluding to.
Considering the global financial crisis that is ongoing and is currently visiting the European Union, the parliament had a wider discussion on returning the Swiss franc itself to being backed by gold bullion, instead of by the promises of politicians and bankers.
What the members of the Swiss parliament are alluding to is the loss of confidence in paper currencies that could develop due to the global financial crisis. Should the situation continue to worsen, it is not out-of-the-realm of possibility that investors and people will lose faith in the ability of politicians and bankers to actually solve the financial crisis.
Loss of confidence means investors and people will sell their currencies, which they perceive to have no value, and buy things that have value, which, as history has shown, have traditionally been hard assets like gold bullion, land, silver bullion, and art; to name just a few.
The odds of such a gold bullion currency coming into circulation are almost zero in today’s marketplace. The Swiss know that if they begin to circulate a gold bullion-based currency, investors around the world would flock to it in droves.
This would drive the price of the gold franc to record highs. In turn, this would cause gold bullion prices to skyrocket as investors would realize that, as the financial crisis around the world continues to wreak havoc on the world economy, gold bullion is one of the hard assets that will preserve one’s wealth amid the chaos.
Furthermore, it would highlight the fact that all other currencies are based on the faith of politicians and bankers, whom people have less and less confidence in to solve the financial crisis.
This debate in Switzerland proves the theory of gold bullion as a preservation of wealth. While others continue to dismiss gold bullion as a useless asset, they cannot wipe out what has been true for 5,000 years.
As the financial crisis worsens, more and more people will turn to gold bullion. I urge my dear readers to do the same. (Also see: Another Reason to Own Gold-related Investments.)
Where the Market Stands; Where it’s Headed:
I don’t know if I should laugh or cry.
Yesterday, the Chancellor of the Exchequer (the U.K.) and the Bank of England (BOE) announced two massive money-printing initiatives to help shore up the eurozone. U.K.’s central bank will start injecting “at least” $7.8 billion into the financial system. The second plan is for lenders to give assets to the BOE in return for cash (no specifics were given).
On the news, stock markets around the world rallied. The Dow Jones Industrial Average jumped 155 points yesterday.
It comes down to this: the stock market is rallying when central banks (anywhere in the world) announce they are printing money. It’s so short-sighted; I don’t know if I should laugh or cry.
To put $7.8 billion into the financial system every month, money needs to be created. To swap assets on the balance sheets of banks for cash, money needs to be created. This is all very inflationary.
Back to the point I have been making in these pages for three years now: there has been no structural improvement to the economy since the credit crisis. All we have experienced are record government debt and money printing. This will all come back to haunt us.
What He Said:
“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.