Guest Post: Consumers Flash Warning Signal

Tyler Durden's picture

Submitted by Lance Robert of Streettalk Advisors

Consumers Flash Warning Signal

At the end of last year we began discussing the issues of the excessively optimistic analysis of the mainstream media and analysts which were confusing a skew in the seasonal data caused by an unseasonably warm winter and global Central Bank interventions with an organic economic recovery. (See the report "Pollyana Meets The Economy" for a primer - free membership required)  The problem with maintaining an "optimistic bias", which attracts readers and viewers for media driven outlets, is that it fogs the lenses of logical thinking.  The recent releases of consumer sentiment and retail sales are clearly a story of an economy, while statistically growing, remains in recession for Main Street America.

construction-spending-gdp-071612Personal consumption expenditures drives a little more than 70% of economic growth in the U.S. as shown in the first chart.  Therefore, it is no surprise that watching consumer confidence, retails sales, personal savings rate and changes in credit can tell you a lot about the real state of the consumer and the likely impact to the economy in the future. 

The recent releases of consumer confidence measures have uniformly shown declines not only in current sentiment but the overall outlook for future economic conditions.  Consumer confidence, despite media analysis to the contrary, DOES MATTER.  Then again why shouldn't it?  If a consumer is financially strained, unemployed or worried about their future they are going to be more reticent about spending and more frugal about where they do spend.

Retail sales in June were much softer than expected, including auto sales, which contradicted manufacturers numbers for the month.  This is an important point.  We have discussed that automobile dealers are again stuffing inventory channels with near record levels of autos even though they are not moving off of the dealer lots.  Furthermore, with auto manufacturers skewing seasonal employment data recently by not shutting plants for retooling during the summer, as is historically the case, this leads to further concerns about future economic data.  (Click here for lawsuit against GM for channel stuffing) 

Retail sales in June fell 0.5 percent, following decreases in both May and April as well.  This is the first time since 2008 that retails sales have declined 3-months in a row, and historically, this has never occurred without the economy either in or about to be in a recession.  With both sales of automobiles and gasoline (lower prices leads to lower dollar sales) stripped out retail sales still declined by 0.2%.  Most importantly this core sales data showed widespread weakness in June with declines in building materials & garden equipment, sporting goods & hobby, furniture & home furnishings, electronics & appliance stores, health & personal care, general merchandise, and food services & drinking places. 

consumer-retailsales-071612As shown in the chart retail sales declines tend to lead consumer confidence reports.  Therefore, with retail sales on the decline we should expect to see further weakness in the coming months where consumer confidence is concerned.  For the markets, however, this "bad news" has been good news as market participants continue to build the case for further stimulative programs from the Fed.  This is why the markets have held up so well in face of a continued string of weak economic reports. 

I have been forecasting that the Fed will most likely launch further Quantitative Easing later this summer (most likely September) in an attempt to stabilize a weakening economy.  The problem for market participants, with high hopes for further Fed induced liquidity, is that with the markets near their highs for the year, and the economy growing at the Fed's assumed target, they may be shooting themselves in the foot.  The Fed has already voiced concerns about "dimished returns" from their actions and with markets stable and "pricing in" future Fed actions there is little room for the Fed to act.

Consumers, however, are reacting to the real life recession that they are faced with everyday.  Stagnant wage growth, high unemployment, government transfers making up more than 30% of incomes and tight credit has made maintaining the status quo a challenge.  The chart shows the month-to-month change in Real Personal Consumption Expenditures and Disposable Incomes compared to changes in Consumer Credit and Personal Savings Rates.

retailsales-income-credit-savings-071612With personal consumption expenditures driving more than 70% of the economy any substantial change to that dynamic could negatively impact the economy.  Since the beginning of this year consumers have seen an increase in disposable incomes due to declines in commodity costs even though wages have remained fairly stagnant.  This rise in disposable income, however, has not made its way into significantly more consumption but instead into higher personal savings rates.  While higher personal savings rates are important to longer term economic prosperity - in the near term it decreases potential current consumption and aggregate end demand which keeps economic growth under pressure.  

One important note is the significant rise in consumer credit in recent months without a relative adjustment to consumption.  Historically there has been a fairly consistent correlation between changes in consumer credit and consumption.  However, as of late we have seen continued increases in credit without coincident increases in consumption.  In our article on "Consumer Credit And The American Conundrum" we go into this phenomenon in much more detail stating: "Most of the deleveraging process that has been occurring up to this point has NOT been voluntary.  Banks have been cutting off excess credit lines, consumers have been defaulting on debt, mortgage foreclosures, and personal bankruptcies. 

Consumers, on the other hand, are struggling just to make ends meet and are in reality doing very little in terms of voluntary debt reduction.  As incomes have decreased over the past two years - the inflationary pressures in food, energy, medical and utilities have consumed more of that declining wage base.  This is why today we have 1 out of 2 Americans on some form of governmental assistance, more than 47 million people on food stamps and transfer receipts making up more than 35% of personal incomes.  It is hard to make the claim that the economy is on a fast track to recovery with statistics like that.  That is why the recent increases in consumer debt are disturbing.  The rise in NOT about increasing consumption by buying more 'stuff' it is about just about being able to purchase the same amount of 'stuff' to maintain the current standard of living.

While bad news may be good news for the market hoping that it will spur more stimulative measures from the Fed to boost asset prices - for Main Street America bad news is just bad news.  More importantly, the decline in consumer confidence continues to perpetuate the virtual economic spiral.  As the consumer retrenches the decline in aggregate end demand puts businesses on the defensive who in turn reduces employment.  The reduction in employment, and further stagnation of wages, puts the consumer further onto the defensive leading to more declines in demand.  It is a difficult cycle to break.

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Pladizow's picture

Bernanke is a whore pretending to be a virgin - we all know he's going to "put out"!

vast-dom's picture

this may be first time in world history that all polls, most fundamentals, debt to gdp, euro crisis, idiotic PE, unemployment, housing, shadow fakery, etc. all are beyond negative yet the markets are propped up more than double their value. this is NOT a mere bubble. this is centrally planned post-ponzi nightmare.

Lucky Guesst's picture

I think this time they want it ALL!

Muppet of the Universe's picture

Seriously, what the crap are all you crazy bastards thinking?  Why in the hell would BB King QE now?

Let's see, the last 3 QE we've seen, including the silent one, came when the market was approaching 20% down (the deathknell for any bubble).

Now we are, what?  12-6 12-8 in the market?  & you crazy MF's are talking about QE?  J to the MF C.

QE is here to prevent the market from catastophic collapse- the prevent the algo machine from playing BEARITORY.

So FFS, stop talking about QE when we are MF 12-7 and climbing fast in market.  mmmmmmmk?


but for the record, the bernank,

brewing's picture

do these sales figures take into account hooker sales at the treasuty dept...

ihedgemyhedges's picture

Funny, my wife of 18 years is pretending to be a virgin too.........and she's does a great job of protecting that fantasy every night.........

SemperFord's picture

Somebody likes to roleplay...

Toxicosis's picture

No, sounds to me like he's not getting any.

LMAOLORI's picture



Well now here's the problem the NY Slime's has it figured ?????? out...

"The American economy is stuck in a new kind of normal, somewhere between crisis and prosperity, and economic policy makers are struggling to define their role."

in full


Fed Is Torn on Tipping Point for Action



otto skorzeny's picture

AWESOME- now with the drought  the MSM won't be able to blame Shalom Ben for the rise in food prices when he announces QE3. It's about to get biblical in proportion-"Human sacrifice, dogs and cats living together, mass hysteria"-P. Venkman

The worst trader's picture

We are all out of money to buy thingamajigs......................

poor fella's picture

Main Street - meet rubber hose...

Thus did a handful of rapacious citizens come to control all that was worth controlling in America. Thus was the savage and stupid and entirely inappropriate and unnecessary and humorless American class system created. Honest, industrious, peaceful citizens were classed as bloodsuckers, if they asked to be paid a living wage. And they saw that praise was reserved henceforth for those who devised means of getting paid enormously for committing crimes against which no laws had been passed. Thus the American dream turned belly up, turned green, bobbed to the scummy surface of cupidity unlimited, filled with gas, went bang in the noonday sun.  - Kurt Vonnegut, God Bless You, Mr. Rosewater

The worst trader's picture

Maybe big O will give us some money for more thingamajigs?

vortmax's picture

We just need to enroll more middle-class families in SNAP so they can have more disposable income. Simple!

JamesBond's picture

O promised to pay my thingamajig mortgage 

Mark123's picture

Retail sales are only as good as they are because we are ONCE AGAIN handing out sub prime credit cards, car loans, student loans, FHA loans etc etc etc.


Imagine what would happen if the markets were not supported by the government/central banks.  Now that would be interesting!!

GeezerGeek's picture

Imagine what would happen if the economy were not strangled by government actions at every level, from local to national. Regulation and taxation are the keys to implementing serfdom.

Bobbyrib's picture

The middle class is broke and money doesn't grow on trees. Demand is not there to sustain the amount of business everyone is claiming regulation and taxation hold back. This is the new economy. If Mitt wins and deregulates the economy and passes the Bush tax cuts nothing will change. This is it. I don't mean to depress you, but the reality is income distribution is so skewed that demand is going to take a while to return.

LMAOLORI's picture


"government transfers making up more than 30% of incomes"


I do believe Main Street is catching on that obama and the Fed are scratching each other's backs and the Fed is only stimulating the 1%

The Real-World Middle Class Tax Rate: 75%

Muppet of the Universe's picture

Thank god elections are coming.  Now the sheeple have a real shot at change!

Westcoastliberal's picture

Want to know the real reason (which I've not seen in print anywhere) for consumer credit increases w/o consumption increases? Simple, Americans have been reduced to living off their credit cards.  They're buying staple items like food, not big screen tv's.

Lucky Guesst's picture

Many are way past credit cards. I personally haven't used them in years. Its cash only so yeah staples come first.

TheCanadianAustrian's picture

The problem with consumer confidence statistics is that they don't measure how people feel; they measure how people SAY they feel.

People are mostly conditioned to put on a positive spin when talking about their future. They can even be MORE inclined to have a positive view of the future when their hope of avoiding homelessness depends on it being true.

adr's picture

Energy costs never really went down. Gasoline was $3.69 in January and February. The high in my area was $3.89. Gasoline right now is $3.59, not much of a savings. During the entire oil price drop gasoline was below $3.50 for about a week, with a low price of $3.29.

With oil back on its way above $90. There will be no pocket change savings for consumers at the gas pump.

Nat Gas falling below $2 didn't matter either. The best fixed contract rate you could get in my area is $4.89 per MCF with $1.65 delivery charge for six months. The best 12 month rate is $5.65 plus $1.65 delivery. The variable rate dropped to $3.59 plus delivery. When nat gas futures were in the $4 range the 12 month rate was $5.65. No savings now.

Nat gas rates hit decade lows but the end price to consumers didn't budge. This bullshit of trading futures does nothing but fuck over the consumer.

God Bless The Virtuous's picture

Yeah, the consumer is flashing a warning signal, and the assholes on wall street and their ilk are crying for more QE from Bubble blowin Ben!

How the fu** are the hard working men and women of this once mighty country going to deal with another round of QE (dollar debasement) and the higher food and energy prices that QE will usher in?

Fu** them is the response from the scumbags of this progressive / communist administration!

We have a transformation to finish!

Obama is out to TRANSFORM the republic, don't you know?

There is no need to be an independent minded, self reliant American.

Hell no! Obama has all the answers and as long as you are willing to sell your soul for the COLLECTIVE you wont need to worry about anything!

Just get on food stamps, free cell phone service, free internet access and all the rest of the goodies that are ripping apart the failed socialist policies across the pond in Europe! An intelligent person learns from others mistakes, not good old Barry, we just need to be a more FAIR country, like socialist Europe!

Free healthcare?

Sure, what the hell!

You have to give it to Barry, he was schooled on the knee of Frank Marshall Davis, you know the card carrying communist,

his education was so complete he now uses the favorite communist slogan,"FORWARD", and no one in the media seems to notice?


The American people see this and as a result are pulling their horns in and doing without.

If the coming election finally clears up the stain of 2008 and the progressive onslaught, then the American people can once again be PROUD of THEIR republic and act like the good Americans we ARE!

Obama and his failed policies are coming to an end, you will see a rebirth of American values and ingenuity come November!

We have one chance to fix this horrific bastardization we so ignorantly wrought in 2008!

Let us not fail this challenge because we sat down! We will overcome!

God bless the republic

skipjack's picture

Americans aren't "pulling in their horns"...they're getting prepared...


Buy food, seeds, guns and ammo.

q99x2's picture

Ain't no one hoping the market will go higher. Bernanke and friends own it and no one else gives a damn what happens to Bernanke and Co.

Fuck em.

Problem Is's picture

I Know What Will Boost Consumer Confidence!  I Know! I Know!!

We can all vote for the Bankster Puppet and worthless cocksucker Bullshit Barry Soetoro...

Or we can all vote for Bankster Puppet and worthless cocksucker Willard "The Rat" Romney...

Boost Consumer Confidence

[  ] Worthless cocksucker Bullshit Barry Soetoro

[  ] Worthless cocksucker Willard "The Rat" Romney

[X] None of the Above

Offthebeach's picture

Those shovel ready jobs should be kicking in. I'll go down to the county courthouse tommorrow and get me one.