Wal-Mart Stores, Inc. (NYSE/WMT), the biggest retailer in the U.S., just reported its second-quarter same-store sales declined 1.4%. As a reader of Profit Confidential, this should come as no surprise to you.
Consumer spending in the U.S. economy is bleak; it doesn’t seem to be improving, and it’s nowhere near what the stock market is depicting. Consumer spending makes up about two-thirds of U.S. gross domestic product (GDP), so if consumer spending continues to decline, our economic growth becomes questionable.
Personal consumption expenditure, a measure of consumer spending, has been experiencing a decline. From between 2010 and 2011, consumer spending increased by little more than five percent. Meanwhile, the rate of change between 2011 and 2012 was only 3.64%. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 16, 2013.)
What Wal-Mart’s contracting same-store sales and slowing consumer expenditure rates show is that consumer spending in the U.S. is not growing. From the statistics, we can see the average American consumer is suffering.
As of February (the latest available figures), there were more than 47.5 million Americans, which is 15% of the population or 23 million households, on food stamps. (Source: U.S. Department of Agriculture, May 10, 2013.) Food stamp usage has increased immensely. So, how can consumer spending increase when we are sitting at record poverty levels in the U.S.?
This “job growth” the government talks about—the official rate—doesn’t include people who have given up looking for work and people who have part-time jobs but want full-time jobs. And even if we put that aside, the majority of jobs that have been created over the past couple of years have been in the low-wage-paying service sector.
Dear reader, the rising stock market—it’s a mirage. And the higher it goes, the bigger the crash will be.
Looking at the monthly budget statement from the Department of the Treasury, in fiscal 2013, year-to-date (that’s October 2013 to this April), the U.S. government has already paid interest of $227 billion on its national debt. For the entire fiscal year 2013, the government expects to pay a little more than $420 billion in interest payments. (Source: U.S. Department of the Treasury, Financial Management Service, May 10, 2013.)
If I calculate the amount of interest payments relative to the national debt outstanding, which is around $17.0 trillion, the U.S. government is paying interest on the national debt at the rate of about 2.5%.
Now, look at these two scenarios…
If we assume that the U.S. national debt will be $23.0 trillion by 2023, then the interest payments on the debt will rise to about $575 billion, not taking interest rate changes into account.
If in 10 years from now, interest rates go back to historical levels and double to five percent, interest payments on the national debt will exceed $1.0 trillion per annum. 2023 is 10 years from now. You can be assured the economic environment will be very different one decade out from today.
But as I wrote the other day, according to the action in the 30-year Treasury market, interest rates may already be on their way up.
Since their peak in July of 2012, the 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00.
Take a look at the chart of 30-year U.S. Treasury bond prices below:
Chart courtesy of www.StockCharts.com
As we can clearly see from the chart, prices on U.S. bonds are falling, which means interest rates are rising. (I am watching the bond market very closely as the recent decline in bond prices is significant.)
Bonds are signaling higher interest rates ahead, something very few economists are talking about. Hence, even if the government cuts back on spending and/or brings more receipts in, the eventual increase in interest rates will offset any short-term reduction in the budget deficit.
In other words, any way you look at it, the national debt will keep rising. Once it reaches the point at which interest costs on the national debt hit $1.0 trillion, there will only be 15 countries in the world whose annual gross domestic product (GDP) is greater than our annual debt interest payments.
What He Said:
“Starting two years ago I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.