There’s no denying that the most important part of the U.S. economy lies in the ability of its consumers to spend money. The U.S. consumer still makes up 70% of the U.S. economy and remains the real crux of the economic downturn. While the U.S. government was dumping trilllions of dollars into bank coffers consumers were neglected, continued to lose jobs and were forced to take home stagnant wages. The data tells the real story.
Last week’s economic data was not a good sign for consumers. 600K+ jobless claims, 350K+ monthly job losses, a 9.4% unemployment rate, the ICSC same store sales figures came in at -4.6%, consumer credit is plunging (a long-term positive, but a near-term negative) and retail sales were down double digits for many of the large big box retailers. The stock market shrugged off the news and and ignored the weak consumer. This is a trend that will not last. At some point the stock market is going to realize that a weak consumer will severely hinder any future growth. Many investors are confident that the consumer will spring back to life, but that is looking less and less likely as the “new bull market” chatter picks up steam.
A recent research note from CIBC World Markets said:
“The green shoots of U.S. economic recovery are a little less green for American consumers. Personal spending is no longer in freefall as it was at the end of 2008, but the ongoing contraction in U.S. consumer spending emphasizes that talk of a full-fledged economic recovery is premature.”
“Although the worst may be over for U.S. consumers as increased government transfer payments help boost incomes, we expect personal consumption to remain weak for some time to come. Despite the market’s recent bout of optimism, the general consumer environment remains challenging.”
David Rosenberg goes into even greater detail on the potential long lasting impact of a weak consumer and the mountain of debt they are trying to unwind:
The chart below is the ratio of household debt to total net worth — it has exploded to an all-time high of over 26.0%. Depending on where it normalizes — either to the pre-bubble level of 20.0% or the long-run norm of 16% — we are talking about between $3.0 and $5.0 trillion of debt elimination in coming years. The household debt to asset ratio (see Chart 2), now at 21.0% versus prior cycle lows of around 13.0%, would also be consistent with over $5.0 trillion of debt elimination. While there will undoubtedly be help from Uncle Sam and the lenders in the form of loan modifications and forgiveness, this overhang is still too big for the taxpayer to absorb. A goodly chunk of this excess debt — bringing credit into realignment with the permanently new and lower level of household net worth — is going to have to be paid down (or defaulted on). This is the lingering deflation risk that the bond bears have yet to factor in.
As we mentioned earlier in the week, I believe there is some chance the Thursday retail sales figures will be better than expected. While stocks might rally on such news it is important to note that most of this uptick will be due to the severe discounting that boosted auto sales. As the big box retail sales figures showed last week, there is no real recovery in retail sales. Unfortunately, the de-leveraging cycle that we are confronted with is not your average U.S. recession. These problems are bigger than anyone ever imagined and will take years to overcome. The stock market has made an enormous move in recent months, but the sustainability of that move cannot and will not continue to have such a large divergence from consumer trends. A bet on the stock market at this point is a bet on the U.S. consumer and, unfortunately, that bet isn’t looking so wise based on the recent data.