Consumer Spending: Why Hibernation
Is Setting in Again

Why consumer confidence amongst Americans is nose-diving.Consumer confidence amongst Americans is nose-diving.

An important report just released by Thomson Reuters/University of Michigan known as a preliminary index of consumer sentiment decreased in July to the lowest level since March 2009. The report is startling for several reasons, but this should not be news for my PROFIT CONFIDENTIAL readers.

If we go back to March of 2009, we remember it as the month the stock market hit a 12-year low. The Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009—a decline of 55%. People were running scared. It was the bottom of the credit freeze.

But why are consumers, who make up 70% of American GDP, so worried again? Several factors are coming into play.

Job growth isn’t happening. This is the sixth year that house prices will fall in the U.S.  People don’t understand theWashingtonshenanigans concerning the national debt ceiling crisis. Is it any wonder that the Commerce Department reported that Friday sales at U.S.retailers stagnated in June?

If American consumers are going back into hibernation now, what will they do when inflation really spikes, interest rates rise to offset rapid inflation, and housing prices fall further as rates for mortgages rise?

Rightfully so, the American consumer is starting to realize that the future really doesn’t look that bright for the economy.

Michael’s Personal Notes:

I’ve been warning about inflation picking up steam in 2011. Government statistics are starting to provide evidence of the heated inflation.

According to a Labor Department report from Friday, consumer prices in the U.S., excluding the volatile food and energy items, climbed 0.3% in June after rising 0.3% in May—the biggest back-to-back gain in three years.

Overall prices rose 3.6% for the 12-month period ended June 30, 2011.

Inflation running at 3.6% and the Fed not raising short-term interest rates? Think about this for a moment. If you buy a 10-year U.S. Treasury, you make three percent on your money. But with inflation at 3.6%, you are actually losing the purchasing value of your money, while paying income tax on your three-percent return.

Something’s not right in the marketplace. But, as always, a regression to the mean will adjust the imbalance. Long-term interest rates will rise.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 7.8% for 2011. The more time goes by in 2011, the more bearish I turn on the economy. There has been no real effort by politicians to slash spending, the Fed stands ready to unleash QE3 if the economy falters…the long-term effects of both are inflation and insurmountable sovereign debt problems.

But, in the meantime, in the immediate term, stocks can—and I believe they will—continue to move higher.

What He Said:

“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S.housing market, which is now affecting lenders, will have significant negative effects on the U.S.economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007, Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.