Friday, August 16, 2013 - Who Knows?

Who Knows?

by Sinclair Noe

DOW – 30 = 15,081
SPX – 5 = 1655
NAS – 3 = 3602
10 YR YLD + .07 = 2.83%
OIL + .62 = 107.95
GOLD + 11.10 = 1378.20
SILV + .25 = 23.36

The Dow fell 2.2 percent for the week, its biggest decline since June 2012, while the S&P 500 dropped 2.1% for the week and the Nasdaq dropped 1.6%; their biggest weekly losses since June, 2013. It was a second week of losses for the major indexes. The yield on the 10 year note climbed to the highest level in 2 years. Gold settled at its highest price in almost two months.

The productivity of US workers rose more than projected in the second quarter. The measure of employee output per hour increased at a 0.9% annualized rate, after a 1.7% decline in the prior three months. Even with the second-quarter pickup, productivity was unchanged in the 12 months ended in June, below the average 2.4% annual gain in the 2000-2011 period. Businesses are reaching the limit of how much efficiency they can squeeze from their existing staff. So, we're at a point where any increase in demand could prompt more hiring, but we're not seeing an increase in demand.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 80.0 from 85.1 in July. We're all consumers aren't we; that's how we are measured; that is our value to corporate America. Earlier this week I repeated the old idea that consumer spending is 70% of overall economic activity. One listener took me to task, writing: “Why do you keep perpetuating the lie that consumer spending makes up 70% of GDP when the federal government alone accounts for more than 20% State and local government accounts for more than 10%. Then there is business spending.  You are supposed to be the one busting these lies.”

By the way, if you would like to take me to task, the email is sinclair@moneyradio.com

The consumer spending thing is like a whole bunch of other statistics, which is to say, it's not very accurate. What government statistics call consumer spending is not what most people consider consumer spending. Most of it isn’t, anyway. Lots of that so-called consumer spending is in fact government spending; Medicare and Medicaid, for instance, are lumped in there, as is most health-care spending, which amounts to about $2 trillion a year,which might tend to throw the consumer-spending numbers off a bit. Health-care spending isn’t really driven by consumers but by insurance companies, government, and other non-consumer enterprises. Something on the order of 15 percent of health-care spending actually comes out of consumers’ pockets.

Other examples of not really consumer spending include money spent by nonprofits, for instance, along with political parties and campaigns. I think that bank fees and such are included in consumer spending numbers, and who knows what else, and it's a certainty that interest compounded into the economy accounts for about 30% of what we pay for everything; and I really don't know how the consumer spending numbers try to reconcile that data.

Never mind, for the moment, that a big chunk of that actual consumer spending goes to things like clothes and electronics and shoes made abroad, and the consumption of stuff made in China has little direct impact on domestic economic activity, the truth is that consumer spending, in reality, represents less than half of US economic activity, probably around 40 percent.

There is a formula for consumer spending, and almost anything can get tossed into the mix, and the formula has changed over time. It's estimated consumer spending was around 75% of the economy in 1929; it grew to 83% in 1932, largely because business spending dropped. Consumer spending dropped to 50% in World War II because of large expenditures by government and very low expenditures by individuals.

I think this gets back to the idea of whether demand or production drives consumption, and as a consequence, economic growth. I tend to think it is demand. Otherwise, the Fed's spending a couple of trillion dollars on Quantitative Easing would have resulted in real economic growth, rather than just inflating asset bubbles. A few trillion in Fed monetary stimulus never really found its way from Wall Street to Main Street. But back to original complaint; you have a point, the consumer spending numbers are skewed. But then GDP is also skewed; if someone buys cigarettes and gets cancer; the cost to treat the cancer is considered as part of GDP, as if it is adding to the growth of the economy rather than watching a part of the economy die. Meanwhile, they are just starting to factor in movies as having some economic value; and we're still a long way from having a poem contribute to GDP. So, yea, the consumer spending numbers are a myth and every economic number is skewed. You and me, we're kind of stuck with the numbers we get.

Anyway, today on Wall Street, retailers took a beating. From Wal-Mart and Gap to Macy’s and McDonald’s, chains that cater to middle- and lower-income Americans. Nordstrom, the luxury department store chain, reported lower-than-expected revenue in its second quarter Thursday, prompting the company to trim its full-year sales and profit forecasts. Nordstrom's has products in their stores, they just aren't finding demand for those products.

Everyone wants to talk about recovery, but it's more like the unrecovery. Look no further than Macy's for a snapshot of the consumer. For its namesake mid-tier department stores, Macy's reported the first decline in same-store sales in nearly four years this week, and said shoppers had been gravitating to its less expensive items. That's a contrast with Macy's upscale Bloomingdale's, which came in with strong results.

The trend also turns up in results posted on Thursday by Wal-Mart, which emphasizes low pricing. Its sales at stores open at least a year unexpectedly fell 0.3 percent last quarter, a second decline in a row, prompting the world's largest retailer to lower its sales forecast for the year.

Last week, a group of retailers including Costco and Gap reported modest gains in July same-store sales, thanks largely to bargains. Adding to the pressure, Macy's said many shoppers are redirecting their spending to their cars, housing and home improvement.

Automakers reported a 14 percent sales increase in July from a year earlier. Home improvement chain Home Depot is expected to report same-store sales rose 7 percent. Outside of home improvement and cars, many retailers say economic conditions were less than ideal.

In July, U.S. employers slowed their pace of hiring, with the number of jobs outside of farming increasing less than economists expected. The average price for a gallon of gasoline in the United States was still high: at the end of July, it was $3.67 compared to $3.51 a year earlier, according to the Lundberg survey. And the problems in Egypt could push the price at the pump into an upward spiral at any moment.

As of May, 47.6 million Americans, or one in seven, received food aid - highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010. Real wages are also stagnating: they fell 0.1 percent between June 2012 and June 2013, according to the Bureau of Labor Statistics, excluding inflation and civil servants and military personnel.

Wal-Mart Chief Financial Officer Charles Holley told reporters on a call: "The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have."

A recent government report showed 5.7 percent of Americans who had jobs in July could not get enough hours to qualify as full-time workers, the same percentage as in June. While the unemployment rate has fallen steadily over the last year, the share of part-time workers who want more hours has barely dropped, according to BLS statistics. Workers are not doing well. They're losing ground because wages are not growing in real terms.

And so, consumers are holding onto their purses. Macy's said shoppers at its namesake chain were holding back on anything nonessential, adding it didn't expect to make up the sales shortfall this year and cut its forecasts. Kohl's said comparable sales had slid for purchases paid for with a credit card, transactions typically made by people on a budget. And both Wal-Mart and Costco said sales of higher-ticket items such as electronics and games have been soft. Several companies have said shoppers are waiting longer to buy back-to-school items, suggesting they are waiting for deals and that they see no urgency to hit stores. This week's results may presage more of the same next week, when big chains like Target, J.C. Penney and Sears report earnings.

Consumer spending may not account for 70% of the economy but the consumer is weary these days. If there really is a recovery, it hasn't made it to Main Street, and without demand, there won't be growth. And for now, the beatings will continue until morale improves.