Tuesday, January 26, 2010

Consumers Lack Confidence, They Also Lack Credit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Before the Credit Crisis began, consumer spending made up 72% of U.S. GDP.  The current economic numbers indicate that there is little chance that this part of the economy will be recovering any time soon. Consumers have neither the desire to spend, nor the availability of funds to make it possible.

The Conference Board's consumer confidence numbers for January came in at 55.9. The historic average is 95 and somewhere around 90 is considered the dividing point between bad and good. While it is true that the current number is better than the depression level all-time low of 25.3 in February 2009, the readings have been range bound between around 50 since last June. The numbers indicate quite clearly that consumers are in no mood to shop. Even if they were, where would they get the money? 

The dismal job picture with 10% unemployment (not including discouraged workers and people forced to work part-time, which brings the U.S. unemployment number to the 17% to 20% level) is only one reason that consumers won't spend. The latest figures from November 2009 indicate that consumer credit was falling at an 8.5% annual rate. Revolving credit (much of which is credit card debt) was falling at an 18.5% annual rate. The big banks that took TARP money with the understanding that they would increase lending have increasingly cut consumers off.

The lack of consumer spending would have had more serious impact on U.S. GDP figures if large increases in government spending hadn't taken up the slack. Government subsidies have held up the housing and the auto markets, but this is completely artificial and produces only an illusion of economic recovery, rather than the real thing. Investors should keep in mind that no sustainable U.S. economic recovery is possible without the participation of the consumer. Otherwise, no matter how good the GDP numbers are in any given quarter, the improvement will only be temporary.

Disclosure: None

NEXT: Home Sales Fall Expectedly

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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