Somehow, in all the confusion, the endangered species known as the American "consumer" missed the economic recovery. The reason, as Bloomberg writes, is that consumers are increasingly "using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices." The data comes from credit card transaction processor First Data which reported that the dollar volume of charged purchases rose 10.7% in June (a 6.8% increase in the number of transactions). "The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor. "Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem." Alas, it gets worse. As Bank of America's Joshua Dennerlein reports today, the end of the year will see 3.7 million Americans stop receiving jobless benefits. "This will act as a hit to consumption in the first quarter of 2012." This number is completely independent of any possible new legislation to extended jobless benefits for new unemployed labor pool entrants, as it merely affects those about to hit the 99 week cliff. Unfortunately even more "growth" over the next 6-9 months will have to come from the Fed and the only thing it knows how to do: print, print, print.
And while this is not good news to the 44 million Americans on foodstamps, or the ever greater number of Americans who not only can not live paycheck to paychek but have to borrow from the future to fund today's staples purchases, knowing full well they can at best pay the minimum monthly amount but never the total due (just like the US government), at least the velocity of money should be rising due to the increased use of leverage by the middle class. Just as the Fed wanted.
Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 percent of the world’s largest economy.
The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year.
The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said.
Who says moral hazard is limited to the kleptocratic oligarchy. It has now shifted to Joe Sixpack. Oh yes: look for all those bank reported credit card delinquency terms to soar in a month or two, assuming they actually reporting anything close to reality, instead of, like Bank of America, lying outright about everything).
The use of credit cards is a “smoking gun” that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto.
“People on the margin are putting necessities on their credit cards and this is a trend that’s very consistent with what lower-end retailers have been saying about their paycheck cycles,” Rosenberg said.
The impact is especially difficult on discount retail stores like Wal Mart and Family Dollar:
Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash strapped,” William Simon, U.S. stores chief, said at a June 15 conference hosted by William Blair & Co. “The paycheck cycle is severe.”
Similarly, customers of Matthews, North Carolina-based Family Dollar Stores Inc. (FDO) are living “paycheck-to-paycheck,” so when gas or food prices go up, “they don’t have the cushion that many others might have,” Chairman and Chief Executive Howard Levine said on a June 29 conference call.
There may be a silver lining:
A possible bright spot is that inflation may moderate as prices of commodities stabilize, Fed Chairman Ben S. Bernanke said July 13 in his semi-annual testimony to Congress. As of July 19, the average price of a gallon of unleaded gas had dropped 7.6 percent from May 4, when it reached an almost three- year high.
Perhaps. However, with Europe launching indirect QE via its own version of QE-cum-TARP earlier today, we predict that the only direction for all commodities going forward (ignore any short-term blips coming out of Congress-based newsflow), will be up.
And now for the really bad news from Bank of America:
Labor market slack remains high. The number of unemployed workers collecting unemployment insurance benefits through their state funded programs fell by 50,000 to 3.698 million. Meanwhile the number of unemployed workers collecting benefits from the federally funded programs declined by 133,000 to 3.698 million. Overall, there are more than 7.3 million unemployed workers relying on unemployment insurance checks for financial support. At the end of this year the federally funded benefits are set to expire so 3.698 million consumers will lose their weekly benefit checks. This will act as a hit to consumption in the first quarter of 2012.
Prepare for the hockey stick economic growth predictions to be brutalized over the next few months as more and more realize that H1 of 2012 is going to be the ugliest period since the beginning of the depression. It also means that the Fed will have no choice but to further devalue the dollar. What that means for various asset classes should be all too clear by now.