While presenting the company’s fourth-quarter corporate earnings and disappointing analysts with its revised outlook, the CEO of Wal-Mart Stores, Inc (NYSE/WMT) said, “We are confident that our low prices will continue to resonate, as families adjust to a reduced paycheck and increased gas prices.” (Source: Cheng, A., “Wal-Mart gives cautious view, citing macro worries,” MarketWatch February 21, 2013.)
Wal-Mart, which is known for its low prices, is feeling the pullback on consumer spending. With American consumer spending making up 70% of gross domestic product (GDP), it is no wonder the U.S. economy contracted in the fourth quarter of 2012.
Sadly, weaker retail sales are not the only signal of poor consumer spending. U.S. businesses piling up inventories and slowing industrial production paints a deteriorating picture of the economy as well.
Inventories of manufacturers increased 5.1% from December of 2011 to December 2012. (Source: U.S. Census Bureau, February 13, 2013.) As for production, companies are producing less. In January 2013, production for consumer goods declined 0.2% from the previous month, production of automotive products plummeted 3.9%, and home electronics fell 1.3%. (Source: Federal Reserve, February 15, 2013.)
Sure, inventories go up in times of economic growth because businesses build up stock in anticipation of future orders. But the situation now is different. Increasing inventories coupled with declining production—it doesn’t paint a pretty picture of consumer spending.
As I look forward, hopes for consumer spending and economic growth are bleak, not positive. According to Bloomberg’s U.S. Consumer Comfort Index, Americans are pessimistic—they say the rising cost of gasoline and higher payroll taxes are hurting their pocketbooks and their ability to spend. (Source: Bloomberg, February 21, 2013.)
Dear reader, the stock market rising in value doesn’t mean consumer spending is rising or the U.S. economy is experiencing a period of economic growth. The reality of the matter is that consumers in the U.S. economy are finally tapped and they’re scared. Consumer spending has always been the only way economic growth has happened in the U.S. If consumer spending doesn’t improve, I will continue to stand on my belief: there is no growth in the U.S. economy.
What He Said:
“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom the peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”