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Revisited: Where is the Money Coming From to Fund Spending
From The Daily Capitalist
When I make a mistake I will admit it.
In my analysis of consumer spending I asserted that the sources of increases in spending were (1) a draw-down of savings and (2) the redirection of defaulted mortgage payments to spending. I was half-right which another way of saying I was half-wrong.
I missed one the basic laws of economics, Bastiat's "Broken Window Fallacy." You know, the kid breaks the cobbler's window, the cobbler pays for a new window and everyone thinks that the cobbler's spending helped the economy because the glazier had work. The fallacy is that the cobbler was going to buy new clothes from the tailor and now can't afford it. So the cobbler still has a window, is out the cost of the window repair and the new clothes. It's a net loss to the economy.
The lesson is that you always need to look at the unseen as well as the seen. I missed that point entirely when I claimed that people spending their mortgage payments on consumer goods. Someone loses here and that is the lender. I forgot to ask what the lender was going to do with the money. Thanks to Caroline Baum, the very excellent writer for Bloomberg to point out the obvious. (See, "Honey, I Lost the House. Now It’s Time to Party.")
Mea culpa and apologies. Unfortunately many, many people made the same mistake (Mark Zandi, David Rosenberg among others).
So, back to the numbers.
Analysis of Sales Report
March retail sales were up 1.6% over February, and +7.6% from a year earlier, not adjusted for inflation. The annual nominal rise was the largest since July 2005. Eleven of 13 major categories showed increases in sales.
Here are the major components of the Census Department report representing 77.4% of total sales:
| % Total Sales (Weighted) | Category | % Change |
|---|---|---|
| 19% | Motor vehicles | +6.7% |
| 13.5% | Food and beverage | +0.2% |
| 13.5% | Department stores and big box retailers | +0.6% |
| 10.8% | Restaurants and bars | +0.3% |
| 9.2% | Gasoline | -0.4% |
| 6.6% | Building and garden | +3.1% |
| 6.1% | Health and personal care | +0.2% |
| 4.8% | Apparel | +2.3% |
First, it is important to note that sales have trended upward since reaching bottom in December, 2008. Here is a wonderful chart from Vix and More putting the decline and recovery of retail sales in perspective as of (as of February 15, 2010; these numbers are not adjusted for inflation):
Here is a chart from Seeking Alpha (Wildebeest) that shows retail sales adjusted for inflation (solid line is 12 month moving average):
This trend is occurring despite high unemployment, declining wages, and other negative factors mentioned in my original article. Nominal discretionary spending increased for the first MoM period in 28 consecutive months.
Without autos, building and garden materials, and apparel, all discretionary spending, retail sales would have been relatively flat especially if one considers the ±0.5% margin of error. Adjusted for inflation real discretionary retail sales were a -1.18% YoY.
What Drove Discretionary Sales?
What drove those discretionary items which contributed the most to the 1.6% increase and where did the money come from?
Auto sales were driven by deals. Discounts, interest-free financing, the impact of Toyota's deals to keep market share, and other incentives were the main factors. People need new cars and if you consider that 83% of the population have jobs, that Cash for Clunkers (ended August, 2009) ate into future sales, that people have been putting off buying a new car because of economic uncertainty, the MoM and YoY gains represented pent-up demand.
Securitized nonrevolving consumer credit, which finances auto sales, has actually increased in the last few months which shows that buyers are relying on auto company and bank financing to purchase the hot deals. This is the only category of consumer credit that increased. This would not impact savings.
I don't expect it to represent a long-term trend.
Building and garden materials is a response to a pick-up in home sales. While low prices are the primary driver of this market, the market has been artificially stimulated by the Cash for Condos program, a tax credit that ends on April 30. Existing home sales surged 6.4% in March MoM. I expect home sales to decline after April. Other factors, such as increased foreclosures, tightening financing standards (FHA), and rising interest rates will act as a natural brake on sales. I expect sales to remain flat. This would cause home improvement related sales to decline.
Apparel sales did well. The reasons given are that better weather and an early Easter holiday boosted sales. I think that is accurate.
There may be some immediate effect on spending as borrowers spend their mortgage money, but the obvious impact is that it will have a negative effect on the economy in the medium to long-term. It doesn't take much time for people to spend their "free" money, but it takes longer for the shortages to impact the lenders, almost all large financial institutions or RMBSs.
Status of Economic Recovery
It is apparent that the economy is starting to rebound. There are several reasons for it. One is that, despite the fact that the long-term impact is negative, there is a lot of fiscal stimulus working its way through the economy. I believe this will have a short-term effect only and will wear off when the money is spent.
I believe there are too many headwinds in the way of a recovery that will impact the economy some time in H2. I have written about this many times and referred to some of these factors in the original version of this article.
There is another factor which I have also written about. That is that some of this recovery is real. The U.S. economy has a remarkable ability to correct its mistakes after a bust, reallocate capital to profitable ventures, and grow again. I cannot discount this fact even though I believe the data doesn't quite support that conclusion.
I don't think that any Austrian theory economist could honestly come to any conclusion on that because it is too difficult to know if "real" capital is sufficient to support new growth. And the reason is that the government is doing so many things to thwart and delay a recovery by supporting companies and industries that need to fail.
Primary among those government policies that delay a recovery is allowing banks to stay alive when they should fail.This is the cause of the credit freeze as credit and money supply continues to decline. In the real estate crash of the late 1980s, more than 2,000 banks, and 1,589 S&Ls, were closed, the Resolution Trust Corporation sold assets wholesale. The economy went into recession in 1990 and started recovering after 8 months. In other words, bad assets were quickly disposed of, banks were put out of business, and credit flowed again. This is not happening this time.
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Remember folks the broken window is on a house that was mortgaged 10 to 1 with incorpooration into a CDO at what another 100-1. Hardly an equal. The other key difference is that the house takes a while to show up while the discretionary spending is reported almost immediately.
US consumers will spend everything they have plus 20%. And then they will spend some more.
The US consumer has been trained to spend money they don't have and they are experts at it.
Great Article! Thank you for having a level head and being logical there isn't much of it out there!
The home repairs are in part ,likely FLIPPERS--contractors, working for investors/syndicates who are paying cash. The transfer of wealth continues, as entry level patient buyers are now squeezed out by the banks not wanting to mess with writing a mortgage.
There is some bunker building going on... Not sure how widespread...
Personally, I've expanded my pantry space about 8x its original size, and now have 3x the capacity for firewood. Just sayin...
I just bought (another) gun safe.
HALLELOOOUUUYA BABY!!
Summer is comming up, and I just spend a shitload on a mega BBQ this weekend for the whole family. Summervacation is booked this weekend and YES I JUST BOUGHT A IPAD!!
I love capitalisme and I hope it never dies!
Oh yeah, and this summer I'M MAXING EVERY CREDIT CARD I OWN JUST BECAUSE I CAN!
http://www.shadowstats.com/alternate_data/money-supply-charts
M1 and M3 moving in opposite directions.
http://research.stlouisfed.org/publications/usfd/page18.pdf
M1 currency component accelerating up.
http://research.stlouisfed.org/publications/usfd/page5.pdf
MZM accelerating down.
I'm still trying to parse the meaning of this, any tips appreciated.
Panafrican Funk
The "shadow stats" was the most important of the 3 charts that you presented for review.
Quantitative easing , TARP, TALF etc were bail outs that paid off gambling debts that were due to no cash or collateral behind the credit default swaps that were written on toxic collateral debt. "Printing money to pay gambling debt" debts do / did not increase the money supply just the public debt.
The collapse in M3 shows Main Street America living on their savings now that all the credit has been sucked out of the system globaly.
M1 which has been rising due to the stimulus is now also imploding albeit at a slower rate.
Keep watching M3, the pricing of the debt that we call 'interest rates' ,the quality of the debt, the success of the debt auctions and unemployment.
If you are so inclined you may also wish to pray.
"I missed one the basic laws of economics, Bastiat's "Broken Window Fallacy." You know, the kid breaks the cobbler's window, the cobbler pays for a new window and everyone thinks that the cobbler's spending helped the economy because the glazier had work. The fallacy is that the cobbler was going to buy new clothes from the tailor and now can't afford it. So the cobbler still has a window, is out the cost of the window repair and the new clothes. It's a net loss to the economy."
This is very true, however, consider that instead of the lender getting screwed now, resulting in a net loss to the economy, it is allowed to mark to fantasy, therefore the LOSS portion of the equation is not being felt or acknowledged.
Does this point have any validity? Clearly strategic defaulters are helping spending. My dad is not defaulting, but is substantially delaying his payments, because he has the bank by the balls with as they have no substantial collateral for the loan that he owes. This has helped his cash flow situation immensely and he has taken the family out a little more, knowing that he has more leeway.
The bank gets screwed, but if they simply lie about their loan values as they've been given the authority to, does the economy take the loss at that very moment? Or when the sh&t hits the fan and they are forced to value the loan?
Thanks so much for the thoughtful post and responses.
I'd guess most of the spending is coming from people spending through their nest eggs, whether IRA, QP, or brokerage - whether their own hard-earned cash or inheritance.
So long as there's enough cushion for people to readjust their spending habits to the new realities, they'll stay afloat. Hopefully, people get jobs before they run out of savings. Right now, personal savings rates are big time negative. I'd say it all rests on whether employment begins to grow (jobs, small biz startups, under the table, whatever). If people begin to spend their earnings, we will have a sustainable recovery.
Perhaps the biggest losers in this scenario, assuming employment recovers, will be in the long run when everyone spent all their own and their parents' money... so the much anticipated giant wealth transfer between generations never happens because it's all been spent. But, then again, if that just makes the future generations hungry and motivated, it could be a good thing.
"The bank gets screwed, but if they simply lie about their loan values as they've been given the authority to, does the economy take the loss at that very moment? "
EXACTLY. The banks are NOT recognizing the losses immediately. For every 100 borrowers who are delinquent, they are assuming 50 will eventually catch up. it is complete bullshit, but in the meantime they can delay recognizing the loss.
And in the meantime, they can fund themselves at zero and buy USTs at 3.75% and generate NIM that will eventually cover their loss.
Not to mention a lot of delinquent mortgages are owned by Fannie and Freddie, who are being funded by deficit spending. So indirectly, missed mortgage payments are a form of deficit spending stimulus.
Claiming missed mortgage payments are stimulative is accurate, Caroline Baum's article is wrong.
Not just wrong, but snotty and incomplete imo. It was gracious of Econophile to finish her argument (and therefor her article) for her. Of course American Consumer, the economic superhero, is going to have a difficult time saving that mortgage money they're holding back... it's against the nature that they have had conditioned in them for too long. Quoting Barry Ritholtz is just the frosting on the guano cake. Can't afford it? Can't afford it? Yeah right Barry, but only after their EUC is cut off - not before. Which says nada about the strategic defaulters who are still working.
PS - Building and Garden? As more people wise up, more people will strategically garden. I put in 100' of raised beds for veggies, and bought a pressure canner that can operate on my new flat-top woodstove. Spent thousands, I did. Green shoots!
Exactly right... No such loss has been taken... So the fallacy does not apply.
I am starting to believe they will never have to mark to market. It will be a gift from the fedres to the banks, a debt jubilee, but we dont get included. That should go over very well with the people, maybe they will give the houses to the poor? Where else are they going with this?
What is a way for us to account for the loss of morality and responsibility accompanying the mark to myth regime?
Quoting "uformula": This is very true, however, consider that instead of the lender getting screwed now, resulting in a net loss to the economy, it is allowed to mark to fantasy, therefore the LOSS portion of the equation is not being felt or acknowledged.
Good point uformula, but I only partially agree because this is comparable to the good old difference between the income statement and cash flow statement (and it's effect on the balance sheet); in the long run pretty income statement numbers don't matter if true cash flows don't materialize. Without positive cash flows or the ability to tap the markets for financing, it's eventually game over, just a question of time really......
Yep, look at GM "repaying their loan", banks reporting profits while hiding major problems. The loss is there but just not recognized yet. The government makework spending (cash4clunker etc..) does nothing for sustainable recovery. It's just another ratchet up on the roller coaster, when we reach the top it's a quick ride back down.