Beware of the Bear Dressed Up as a Bull

Income is the largest factor when it comes to determining changes in the consumer spending. Unfortunately, personal income is declining in the U.S. economy—not a good indicator; no matter how anyone tries to spin it.

In the first eight months of 2012, the average change in real personal disposable income (income adjusted for price change) in the U.S. economy was 0.11%. In the first eight months of this year, real personal disposable income has actually contracted by 0.4%. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 4, 2013.)

As real disposable income pulls back, we are seeing the effects of slow consumer spending starting to emerge.

Total light vehicle sales by the automakers in the U.S. economy declined 4.2% in September compared to the same period a year ago. Passenger car sales declined 5.6% in the month. Automakers like General Motors Company (NYSE/GM) saw their total car sales fall 17.1% in September from the same period in 2012. (Source: Autodata, October 1, 2013.)

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Another indicator of slowing consumer spending, crude oil inventories are increasing. For the week ended September 27, the Energy Information Administration reported that there was a build-up of 363.7 million barrels of crude oil in the U.S. economy. The agency reiterated these inventory levels are “toward the upper range for this time of the year.” (Source: Energy Information Administration, October 2, 2013.) When there’s less consumer spending, or companies are producing less, then fewer barrels of crude oil are used.

And worst of all, 19 companies in the consumer discretionary sector of the S&P 500 have issued negative guidance about their corporate earnings for the third quarter. (Source: FactSet, September 30, 2013.) This is roughly 23% of all the companies in the sector. (Source: S&P Dow Jones Indices, September 30, 2013.) The consumer discretionary sector is very dependent on consumer spending. Companies in this sector see the trends in consumer spending long before anyone, because they are very close to the customers. If they are warning about future profitability, something isn’t right when it comes to consumer spending.

Mainstream outlets are too focused on the debt ceiling debate and the U.S. government shutdown. Few are talking about consumer spending, which can actually change the fate of the U.S. economy going forward. We are fixated on quantitative easing, which helps out the big banks and Wall Street, but not the average American Joe. And optimism among stock advisors is growing again. The reality of what’s going on in the economy, dear reader, is very different from the picture the stock market paints. Beware of the bear dressed up as a bull.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worst economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in Profit Confidential, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.