More Contradictions in Third Quarter GDP

 

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.

The Commerce Department reported today that third quarter GDP increased at a 2.5% annual rate. A supposedly much lower inflation rate created significant improvement over numbers from earlier in the year. There was also a surge in consumer and business spending reported, although other recent surveys contradict the claims in the GDP release.

Real personal consumption expenditures (consumer spending) increased by 2.4% compared to only 0.7% in the second quarter. Most of this was caused by a 4.1% increase in durable goods purchases. Nondurables were barely changed. Delayed auto and parts shipments from Japan because of disruption from the massive March earthquake can account for more sales being reported in the third quarter, but not likely to be repeated in the fourth. Despite claims of much higher consumer sales, businesses barely increased inventories in the third quarter — something they would do if they saw their sales climbing. Moreover, consumer confidence surveys indicate consumers were gloomy in the third quarter and readings have now fallen as low as they were around the bottom of the 2008/2009 Credit Crisis. Consumer confidence surveys are not controlled by the government and act as a check of the reliability on government statistics. 

While businesses didn't seem to notice any increase in customer spending, there was nevertheless a frenzy of equipment and software buying going on. This supposedly increased by 17.4% during the quarter. Apparently, I missed the all the news about major software upgrades and equipment innovations that took place this summer. Nonresidential structure spending was almost as buoyant increasing by 13.3%. Where this building boom is taking place isn't exactly clear. Coincidentally, the unemployment rate among U.S. construction workers is also 13.3% (See Household Data Table A-14 of the September Non-Farm Payrolls Report). As bad as this is, it is still a year over year improvement.

GDP figures are also boosted if the inflation rate is lower. It's a lot easier to report better inflation numbers — all it takes is some statistical adjustments — than it is to actually improve the economy. Inflation was supposedly 3.3% in the second quarter, but only 2.0% in the third quarter. Nominal GDP is reduced by the inflation rate to get the final figure. The change in inflation, whether or not it actually took place, added much of the improvement seen from the second to third quarter, not an increase in economic growth.

Mass media coverage about GPD was of course ebullient about what good shape the U.S. economy is in. Of course, we won't know the actual number for several more years. This report is only preliminary and there are two adjustments that will be made to it and then annual revisions every July. In the last several years, adjustments have been mostly down, sometimes by very significant amounts. Even then, that number is going to still be overstated because the U.S. consistently understates its inflation rate. To find an approximate level of the actual GDP, just subtract 3% from the reported number. This will give you a more accurate sense of what is going on in the economy. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

July Consumer Spending - Reports of Its Health Greatly Exaggerated

 

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.

The U.S. stock market reacted jubilantly to July's consumer spending numbers. Apparently, it didn't see the bad news the BLS report contained. Some of this was understandable since the AP (Associated Press) article -- carried by hundreds of news outlets -- seems to have reported more favorable numbers than the ones the government released.

The important take-away from the report was that disposable personal income adjusted for inflation (or more accurately adjusted to reflect some of the inflation that actually exists) was down 0.1%. So if there was any increase in consumer spending, it was taking place on money being borrowed by already tapped out consumers. U.S. consumer debt, including mortgages, is already more than the $15 trillion GDP. Federal government debt is approaching that amount.

Both the BLS and AP reported that consumer spending increased by 0.8% in June. This number is unadjusted for the official inflation rate. The rise was concentrated in the durable goods component of the report. The BLS reported this as being up 2.0% and AP had it up 1.9%. Apparently, U.S. consumers ran out and bought more automobiles and automobile parts in July. According to the government, they then spent less on non-durable goods (items that last less than a year). According to AP, they spent more.

The BLS report had non-durable goods spending down 0.3% in July. AP reported it up 0.7%. Both reports had spending on services being up, the government by 0.5% and AP by 0.7%.  The story reported by AP was far more favorable that the one told by the U.S. government, which was in turn much more favorable than would be the case if some realistic inflation rate was used. The discrepancy for the non-durable and services numbers in the two versions is probably a consequence of AP using numbers not adjusted for inflation. These numbers will always make things look as favorable as possible. This is not news; it's public relations that favors Wall Street and makes the government look like it's doing a better job with the economy than is actually the case. Traditionally, this would be referred to as propaganda.

While the spending on durable goods was concentrated in transportation, increases for services took place because Americans were using more electricity to run their air conditioners during the record hot weather in July. This does not indicate the economy is getting better, nor that it is even flat. It indicates that it was hot in July. Yet, the AP couldn't wait to quote economists that claimed the consumer income and spending numbers that it reported indicated a U.S. economy with rosy prospects. Perhaps they should try including comments on the actual numbers next time.

The BLS report can be found at: http://www.bea.gov/newsreleases/national/pi/2011/pi0711.htm

One of the hundreds of places the AP report can be found is:
http://finance.yahoo.com/news/Consumers-spending-rebounds-apf-1701587266.html?x=0&sec=topStories&pos=4&asset=&ccode=

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Consumer Confidence At Recession Levels Again

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.


September consumer confidence dropped to 48.5 from a lower revised 53.2 in August. The number was below analyst expectations. Stocks dipped sharply on the news.

The latest confidence numbers from the Conference Board show the disconnect between consumer perception of the U.S. economy and the spin being presented by officialdom is getting wider and wider. A confidence number of 90 or above indicates a positive view on the economy. The current number is lower than the lowest number from the 2001 recession. It is in fact barely above the lowest number recorded during any recessionary period since 1980, except for the recent Great Recession. Yet, government officials and the mainstream media keep telling us that the U.S. economy is in recovery. Based on their own experiences, American consumers aren't buying it.

The current conditions number for September came in at a close to a rock bottom 23.1. This view on the current state of the economy has yet to make any significant move up since the Credit Crisis in 2008. What caused the overall consumer confidence numbers to rise in the last year was the expectations component, which represents consumers' view of what the U.S. economy will be like in the future. After an onslaught of 'the economy is on the road to recovery' propaganda emanating from Washington, D.C. and dutifully repeated by the mainstream media, American consumers in 2009 started becoming increasingly confident that a better economy was waiting for them down the road. After not seeing this happen month after month after month after month after month after month, consumers are starting to have their doubts though. The expectations number fell from 72.0 in August to 65.4 in September. If it remains on its current trajectory, the overall confidence number will get back to where it was during the Credit Crisis.

Consumer spending accounts for 72% of GDP. Consumers without confidence don't spend. Consumers without jobs and credit don't spend either. Nevertheless, the government has consistently reported an increase in consumer spending taking place while total wages and salaries have fallen and available consumer credit has been reduced. The savings rate is higher than it used to be as well, which should lower consumer spending even more. But the rules of arithmetic and economics are different in Washington, D.C. than they are in the rest of the universe (the only other known exceptions are in government statistical offices in other world capitals). For some reason American consumers are choosing to view the world as they see it instead of accepting fanciful claims from the Washington con machine. If this continues, even stock traders might eventually catch on.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

August Beige Book Admits Economy Heading Down

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.


The Fed just released its Beige Book summarizing U.S. economic conditions up to the end of August and the takeaway was "widespread signs of a deceleration compared with preceding periods". In general though the report was a mastery of double-speak and attempted obfuscation.

The Beige Book is a compilation of anecdotal reports on various sectors of the economy from the Fed's twelve regional districts (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco). The Fed uses it as an additional source of information when determining economic policy. If they trust the numbers produced by the U.S. government statistical agencies, it's not clear however why it's necessary to produce this monthly study.

The Beige Book for August seemed particularly strained in its attempt to put some rosy spin on its findings. This was most evident in the section on Consumer Spending and Tourism. The opening sentence was positive and gave the picture of a slow growth economy (the story the Fed is trying to sell to the voting public):

"Reports on consumer spending were mixed but suggested a slight increase on balance. Most Districts reported that non-automotive retail sales rose compared with the previous reporting period or were above their levels from 12 months earlier."

The details that followed however indicated that consumers throughout the country were acting as they do during a recession:

"Atlanta reported a decline in the level of sales, and Richmond noted that sales "sputtered" in August, while New York and Dallas reported that growth in retail sales slowed. Several Districts noted an emphasis on necessities and lower-priced goods. Boston reported that back-to-school purchases were focused on immediate needs; in Cleveland, consumers focused on "value-priced seasonal items;" and in St. Louis, Kansas City, and San Francisco, sales were relatively stronger for lower-priced items."

Interestingly, the report goes on with a positive view of auto sales, even though they fell by 21% year over year in August and 5% on a monthly basis according to industry source Autodata:

"Most Districts also reported that sales of new automobiles and light trucks were largely stable or up slightly during the reporting period."

The Beige Book's authors would have provided a more accurate description of the state of the U.S. economy in August 2010 if they simply stated the following:

"Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending. Districts reporting on auto sales described them as falling or steady at low levels."

This would have made their work much easier as well, since this is a statement from the Beige Book for August 2008.  That report was issued just before the U.S. economy fell off a cliff.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Less Credit and Income = More Consumer Spending?

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.


As of June, consumer borrowing has now dropped 16 out of the last 17 months. Credit Card debt has fallen 21 months in a row. The personal savings rate in June rose to 6.4% from 2.1% before the recession began. Wages and Salaries are down 3.6% in the last two and half years. Despite decreased credit and income and increased savings, all three of which are negatives for consumer spending, GDP figures claim American consumers are buying more.

U.S. GDP growth has been fueled by consumer borrowing for many years. Consumer credit grew faster than GDP before the Credit Crisis hit, but is now moving in reverse.  June 2010 total credit card debt (revolving credit) has now fallen below the November 2005 level. American consumers over the decades have accumulated far too much debt and deleveraging is a trend that is likely to go on for many years. This is certainly a negative for an economy that has been built on consumer spending. Even with consumer credit staying steady, it would be hard for the GDP to rise.

The reduction in consumer borrowing is not a voluntary process. The big banks are cutting credit limits, cancelling cards and demanding pay downs. Consumers are choosing to save more though. The savings rate was only 2.1% in 2007. Then it was 4.1% in 2008 and 5.9% in 2009. It was 6.0% or over each month of the second quarter of 2010. More savings means less consumer spending and this trend is likely to continue as long as consumers feel insecure about the economy.

According to the BEA (Bureau of Economic Analysis), wages and salaries of U.S. workers have declined only 3.6% since the first quarter of 2008. This small drop is really surprising considering the unemployment rate was 5.0% in December 2007 and was 9.5% in July 2010. More government jobs and government subsidized jobs prevented this number from being much worse.

Even more amazing, total personal income actually increased by 1.5% during this time. How is this possible during a recession?  Examining the figures indicates that there was a 27% increase in 'Government Social Benefits to Persons' in the last nine quarters. These various forms of stimulus payments, which are essentially welfare, along with government subsidized employment, were paid for by the approximately $3.5 trillion in deficit spending in 2008, 2009, and 2010. This has been the major source of funds for consumer spending recently.

So even though consumers have been borrowing less, the government has been borrowing more and giving the money to consumers to spend (or at least to some consumers). This is equivalent to the 'bread and circus' of Roman times. It is not a sustainable model for economic growth. Nor is it even honest to claim that this is actually economic growth. We don't exactly live in an age of financial honesty however - and that is another trend that can be expected to continue.

Some of the data for this article can be found at: http://www.bea.gov/national/nipaweb/TableView.aspSelectedTable=58&Freq=Qtr&FirstYear=2008&LastYear=2010).

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Bernanke Testimony Indicates Fed Still in Denial

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.


Fed Chair Ben Bernanke testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

U.S. Consumer Spending: Not Indicating Economic Recovery

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.


The Commerce Department released figures for February consumer spending on March 29th. The report indicated that consumer spending was up 0.3% in February, but personal incomes were flat. The savings rate was lower though, dropping to 3.1% from 3.4% in January. Spending increases were highest for necessities, such as food and clothing. Spending on non-durables actually fell. Nevertheless, somehow the mainstream media looked at these figures and concluded, "Both the spending and income figures in Monday's report point to a modest economic recovery".

Now for a dose of reality.

If income is not going up, but consumer spending is going up, there are only three possible explanations. Consumers have either gotten increased credit and are borrowing more, they are spending savings, or they are selling assets.  If they are spending savings or selling assets to support their spending, the economy is in very bad shape, somewhat similar to the way it was during the Great Depression in the 1930s. Since the savings rate was still a positive number, consumers were not taking more money out of their savings accounts than they were putting into them. So consumers were still saving, but at a lower rate. The 'Personal Incomes and Outlays' report (that's its official name) doesn't analyze buying and selling of assets, but does have a figure on 'Personal Income Receipts on Assets' that includes interest and dividend income. This number decreased by $16.5 billion in both February and January and that may indicate that the public is quite possibly a net seller of assets. Consumer credit is also not handled in the report, but the latest figures from the Federal Reserve indicate that revolving (read credit card) consumer credit declined at a 2.5% annualized rate in January.

While the sources for the supposed increases in U.S. consumer spending are murky at best, the amount of consumer spending in and of itself is not a determinant of whether or not economic recovery is taking place. The increased spending needs to come from economic growth and not government spending. If it comes from more government spending, better numbers are just a shell game and are actually an indicator of just how troubled the economy really is.  U.S. consumer spending rose $34.7 billion in February. Of that amount, $16.6 billion came from an increase in federal government transfer payments. That is only the one-month change in federal spending being funneled directly into consumer's pocket. Government support for the U.S. economy has increased substantially and in myriad ways since the beginning of the recession in December 2007.

While consumer credit has declined significantly since the Credit Crisis began, government borrowing has increased to make up the slack. This is why the U.S. is facing a $1.6 trillion budget deficit in fiscal year 2010.  The record levels of government borrowing are propping up the entire U.S. economy, including consumer spending. Governments don't spend more when economies recover; they spend less. Only when U.S. government spending begins to decline sharply and reports come out that consumer spending is increasing should investors consider believing that economic recovery is really taking place.

Disclosure: None

NEXT: Market Says U.S. Treasuries Riskier Than Corporate Debt

Daryl Montgomery
Organizer,  New York Investing meetup
http://investing.meetup.com/21

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.

The Impossible Contradictions of U.S. Consumer Spending

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.


Consumers are the key to any U.S. economic recovery since they account for around 70% of GDP. Revised 2009 fourth quarter GDP figures just released indicate that consumer spending rose 1.7% on an annualized basis. This was after a reported 3.8% rise in the third quarter. These numbers are certainly good and indicate an economy on the mend if they are accurate. Unfortunately, there is little likelihood that they are.

To spend more money, consumers have to have more money. They can get the extra money through higher compensation (such as wages), larger interest and dividends payments, by drawing down savings or by being given additional credit. All of these numbers for 2009 indicate that consumers had less money to spend. According to BEA (Bureau of Economic Analysis) figures updated as of February 26, 2010 and the latest Federal Reserve credit statistics, the following changes took place during 2009:

Employee Compensation     Down    3.2%
Interest Income                   Down    4.9%
Dividend Income                 Down  16.4%
Revolving Credit                 Down     9.5%
(mostly Credit Cards)

Consumers not only had less income and credit available, they also saved more. The U.S. savings rate went up from 3.8% at the end of 2008 to 4.1% at the end of 2009. So consumers earned less money and then on top of that they saved more of that smaller amount of money. Their borrowing power dropped as well. Yet, while this is happening the government keeps reporting consumer spending is going up. There seems to be some sort of contradiction here.

The recent GDP figures indicate that this mystery can be explained by a huge drop in personal tax payments in 2009. The government claims that individual taxes dropped 25.8% during the year, an amount that is much, much bigger than the decline in income and which occurred during a period when there was no major federal tax cut (there were numerous small ones for certain groups in the stimulus package). The supposed large drop in taxes paid gave U.S.consumers an increase in disposable income. They apparently went out and spent it all immediately.

Based on the above information, there are those who might not believe that U.S. consumer spending is actually increasing. For instance, people who took first grade arithmetic and have at least some minimal attachment to reality are likely to be skeptical. If on the other hand, the average U.S. taxpayer cut their tax bill by 26% last year (presumably a number of people got 30% and even 40% reductions) while experiencing only a small drop of income, I am obviously out of the loop. In that case, please send me the name of your accountant ... unless of course he or she has been indicted or is already in prison.

Disclosure: None

NEXT: Greek Crisis Impacts World Currencies and Gold

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

U.S. Consumer Credit - Being Held Up by Government Loans

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.


Consumer spending is the lifeblood of the American economy. Before the Credit Crisis, it was responsible for 72% of U.S. GDP. American consumers don't spend the money they have though, but depend on the money they can borrow. Aggregate U.S. household debt (including mortgages) is actually so large that it is bigger than the enormous government national debt. Consumer Credit has been crimped however since the recession began in December 2007 and experienced the longest continual drop in on record in 2009 and the biggest single month drop ever last November (records go back to 1943). Without a big increase in credit from government loans, things would have been even worse.

The Consumer Credit figures don't include mortgages and other real estate related loans. The total outstanding for these other loans was $2.7 trillion as of December 2009. The total in December 2007 was also $2.7 trillion (there was actually a minor $23 billion increase between the two periods). While it looks like Consumer Credit managed to remain flat for the last two years, this doesn't tell the whole story by any means. A big drop in one area was offset by a rise in another, and that took place only because of federal lending. 

There are two types of consumer credit - revolving and nonrevolving. Revolving is mostly credit card debt. Nonrevolving loans are for fixed periods, such as auto loans and student loans. Credit for revolving loans fell 8% between December 2007 and December 2009. The drop was even bigger from December 2008 to December 2009. While credit card debt was falling (there was a period of 15 months with consecutive drops), nonrevolving loans were increasing and have grown 7% so far since the beginning of the recession. While the Cash for Clunkers program certainly fueled car loans in this category, these are not counted as government loans in the credit statistics. Those government loans that are counted, such as student loans, increased by 89% between the end of 2007 and the end of 2009.  All government loans are in the nonrevolving category, without them revolving credit would have experienced a two-year drop, not a 7% gain.

Decreasing Consumer Credit is not surprising. American consumers were over leveraged before the recession began. Banks have been encouraged by regulators to tighten their lending standards and reports indicate that consumers are having trouble getting bank loans. Unemployment has soared, so this should be the case since fewer consumers are credit worthy. The February employment report indicated that approximately a million workers left the labor force between December 2009 and the early part of 2010 (this is the only way the numbers add up). Consumers have also been saving more because of the poor economy.
Despite less credit, a loss of income from less employment, and less money available for spending because of increased savings, the U.S. government has been reporting that consumers are spending more. The Consumer Credit figures indicate that it's not the consumer, but the government that's spending more.

Disclosure: None

NEXT: Will EU Accept Greece's Trojan Horse of Debt?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

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
http://investing.meetup.com/21

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.

Our Current Economic Illusions

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.

Our Video Related to this Blog:

When reading economic statistics, you should see if they are consistent (they rarely are) and make sense based on real world observations (lately they don't). On Thursday, December 3rd the U.S. productivity numbers were released, as were same store sales and weekly unemployment claims. The story these three pieces of data are telling are quite different, which means at least one and possibly two of them are not correct.

Productivity in the U.S. is supposedly up astronomically. It rose by 8.1% last quarter and this is after being revised down from being up 9.5%! The recent downward revision of third quarter GDP from 3.5% to 2.8% meant the productivity numbers would be lower as well. Productivity is essentially the amount of GDP produced per worker. Since employment is falling in the U.S. and GDP is supposedly rising (the two moving in opposite directions is illogical) productivity has to go up. According to the government, it is going up a huge amount. Is there any major new technological advance or innovation accounting for this? None, that anyone knows about. Economists claim that productivity has gotten better because the least productive workers have been fired. While this might give the numbers a percentage or so boost, it wouldn't give them an 8% boost. The alternative explanation is that GDP is being grossly overstated by the U.S. government. There is substantial documentation that this has indeed been the case for the last three decades.

Same store sales is not a government report and the November numbers clearly show an economy in trouble. Sales were down 0.3% year over year. While this may not seem so bad initially, it is when you consider sales were down 7.7% last November, which was the height of the Credit Crisis meltdown. They are even lower now. Analysts (who are almost always wrong) originally forecast a 5% to 8% increase for this November. Consumer spending accounts for 72% of U.S. economic activity and is still obviously in bad shape. Yet, the government tells us that GDP is growing nicely. There seems to be a contradiction there.

If you read the mainstream media coverage of the weekly jobless claims you would have seen that the U.S. employment situation is getting better because there were only 457,000 new claims during the week of Thanksgiving. Of course, you might consider that few employers would lay off workers right before a major holiday and that state unemployment offices were closed because of the holiday, so this would obvioulsy lower claims. The BLS (Bureau of Labor Statistics) states that they make some 'adjustments' for this though. Claims at even the 400,000 level indicate significant recession and they need to drop to the 300,000 level to indicate a healthy economy (you will see much higher numbers cited in most mainstream media reporting). Continuing claims are still rising and have hit 5.5 million. This number doesn't include an additional 4.5 million on extended umemployment benefits. A large percentage of the American work force is not eligible to collect unemployment as is, so the numbers are even worse than they appear. While there are those who claim that unemployment is a lagging indicator, statistics from the past don't support this notion. The real lagging indicator seems to be the truth about what is really going on in the economy.

NEXT: U.S. Employment Figures Don't Add Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

Bank Earnings Reveal True State of Economy

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.

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Consumer spending represented 72% of the U.S. economy before the Credit Crisis hit. During the 2000s, that spending was fueled by easy credit and free money thanks to Federal Reserve and legislative policy. The borrowing binge hid a deteriorating economy for years and alternative economic statistics indicate that the U.S. has really been in a recession almost the entire last nine years. The bill has now come due and it is going to take many years to pay it off. The economy can not have a sustainable recovery under such circumstances no matter how many times Ben Bernanke and mainstream economists say this is happening. Wishing just doesn't make it so.

Bernanke has repeatedly told the world how he and the other central bankers saved the financial system from disaster (modesty along with good reality perception are not his strong points). It would be more accurate to state that they postponed disaster with their actions. It addition to an almost unlimited amount of money pumped into the global financial system (much of it freshly off the proverbial printing press), the U.S. changed its accounting rules on the toxic debt held by the big banks so massive losses could suddenly disappear into thin air. Big bank earnings rose spectacularly last quarter as a result. This blog pointed out at that time that losses for the lending operations - the reason banks are in business - were deteriorating however. This deterioration was being hidden by big 'gains' in bank's trading operations (thanks to the change in accounting rules). Those losses have continued to grow this quarter and for many banks are now outpacing the phantom gains from accounting tricks.

The two biggest U.S. banks at the beginning of the Credit Crisis were Citigroup and Bank of America. Last quarter Citi lost 27 cents per share versus a 61 cents loss in Q3 in 2008. Citi had $8 billion in net credit losses and increased its net loan loss reserves by $802 million between July and September. Bank of America lost 26 cents in Q3 versus a gain of 39 cents a year ago. Bank of America's credit losses last quarter were almost $10 billion ( a billion higher than in Q2) and it added a whopping $2.1 billion to its loan loss reserves. Credit card losses for Bank of America were $1.04 billion last quarter versus only $167 million a year earlier.Supposed 'gains' from trading operations kept the top line numbers from being much worse.

Does this look like a banking system that has been saved? Does this look like what would happen in a recovering economy? If the government took back the $45 billion in TARP funds from Citigroup would it be in business the next day? If not, it is insolvent. Ditto for Bank of America. As long as these banks (and others) are in the too big to fail category, money printing is going to be necessary to pay for the continued bailouts that they'll need. Government largess is the reason the stocks of these banks have not collapsed back to last years levels. The same can be said for the stock market overall.

NEXT: Big Bust on Wall Street

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

If You Ignore the Facts, Things Are Good

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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We are going to see a lot of new economic data in the next few days, including the monthly jobs report tomorrow. How the market reacts in the first four trading days of the quarter can give us a lot of insight on where stock and commodity prices will be heading in the next few months. The Consumer Spending report was already out this morning and spending for August was up 1.3%, the biggest gain since October 2001. The rosy numbers were due to the Cash for Clunkers program which ended August 31st... so don't expect September's numbers to look as good. The ISM Manufacturing report for September will be out later this morning and might provide more insight into the post Cash for Clunkers era, although the October report next month will be more revealing.

Weekly jobs claims surged upward to 551,000 this morning. The big rise was a surprise to economists and other people who's expectations are based on fantasy. Any number at or above 400,000 indicates the economy is in recession, 551,000 indicates a somewhat severe recession. A healthy economy has weekly claims at the 300,000 level. The idea that the economy can be recovering while unemployment gets worse is absurd and merely reflects how manipulated U.S. GDP figures are. The government can also 'statistically adjust' the jobs report as well. Watch to see how many people left the labor market in tomorrow's report. This is the fudge factor that the government uses to keep the reported unemployment rate from getting too high.

While all the money pumping the Fed has done in the last year has had only temporary and limited impact on the economy so far, it has certainly revved up the stock market. Last quarter was the best quarter for U.S. stocks since the fourth quarter of 2008 - the beginning of the tech bubble blow off that lasted until the beginning of 2000 and was followed by a Depression level drop in stock prices. The last six months have been the best two quarters for U.S. stocks since March 1987. Five months later U.S. stocks dropped 40% in only a few days. That was also at beginning of a bubble blow off. Only a handful of stocks survived the 1987 crash unscathed - most of them were gold miners. So far history seems to be repeating itself vis-a-vis money pumping and stock price behavior.

The IMF (International Monetary Fund) released revisions to its GDP predictions this morning. It now expects global GDP to decline only 1.1% this year, instead of 1.4% and for GDP to increase by 3.1% next year, instead of by 2.5%. While the report had the usual cheer leading bullish tone, a remark made at the press conference inadvertently revealed the truth. The IMF spokesman stated that the report "should not fool governments into thinking the crisis is over". Apparently they wanted to make it clear that their report was only intended to fool the public. The IMF also stated that the pattern of global demand needs to be rebalanced and this could not happen at current exchange rates and that countries with huge export surpluses needed to revalue their currencies upward. Doesn't that imply that countries with huge export deficits like the U.S. will see their currencies revalued lower? So much for that good news.

NEXT: Unemployment Rises as Car Sales Collapse

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

A Recovery Reminscent of 1990s Japan

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... Again

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

Economy is Bad, but GDP Report OK

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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For those who missed it, the cover of the latest issue of Newsweek has a blaring headline, "The Recession is Over". This 'just wishing makes its so' approach to economic forecasting is being pushed by the Fed and some of its compatriots. I have yet to read though of even one industry that is showing growth in the alleged economic rebound that is taking place. Nevertheless, there was a lot of fanfare for the release of today's GDP Report and how it would show things are getting better. I had no doubt that it would considering the GDP figures are probably the most manipulated and unreliable ones that the U.S. government produces.

Yesterday I checked the 2007 and 2008 GDP figures. If you look at the BEA (Bureau of Economic Analysis) website, you will see that during 2008 the U.S. GDP increased over $450 billion. This a rather eyebrow raising figure considering that the U.S. was in the worst recession since the 1930s during all of 2008 and the classic definition of a recession is declining GDP. If only our current batch of government statisticians had been around in the 1930s they could have made the GDP numbers go up and shown conclusively that there was no Depression! Then they could have used the good GDP numbers to show people that they weren't really hungry and unemployed.

The headline number in today's GDP Report was a decline of 1.0%. For the past year the economy has declined 3.9% (or at least that's the not as bad as the real story official number). It also seems that first quarter GDP was revised downward from minus 5.5% to an even worse minus 6.4%. Looking inside the report, there is little that is positive other than the current declines are less than the previous declines. The big improvement in last quarter GDP did not come from either the consumer or business sectors, but from government spending and trade.

Consumer spending which accounts for 70% of GDP can be summarized as: spending on durable goods fell 4.0%, spending on nondurable goods decreased 7.1%, and spending on services was down 2.5%. Business investments fell at an 8.9% annualized rate during the second quarter and Inventories declined by $141.1 billion. Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Investments in housing went down for the 14th consecutive quarter, dropping at a 29.3% annual rate. While the actual economy itself was devastated, good news came from the government sector of GDP. Federal spending rose 10.9%! Imagine how good the GDP Report could be if the federal government printed and spent even more money?

Interestingly, the GDP deflator (the inflation rate used to calculate GDP) was 2.2%. I was amazed the government admitted to so high a number. Last year for the second quarter report it was 1.2% even though this was when oil and food prices were skyrocketing. The government claimed that there was almost no inflation at that time despite the obvious. According to classic economics, inflation can't exist during a recession. Also according to classic economics money printing causes inflation. It's quite obvious which one is winning in this case.


NEXT: Critical Juncture for Dollar and Stocks

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

The Stupidity Pandemic; U.S GDP Tanks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The handling and coverage of the current swine flu outbreak has lots of lessons for investing. While the word pandemic is constantly being used by medical authorities for the spread of the flu, the only pandemic that seems to exist is the stupidity in handling and reporting the problem. No realistic concept of probability is being utilized in the amount of attention being paid to this incident. The same problem causes bad investing decisions. Meanwhile, the U.S. GDP figures were released this morning and the 6.1% decline was much worse than analysts had expected.

In my experience, doctors generally have a poor sense of probability and they also tend to be bad investors. The complete lack of context and statements from the medical establishment about the swine flu outbreak vividly illustrate this. Flu of some sort is omnipresent in the U.S and it is a major cause of mortality with an average of 36,000 flu related deaths annually in the 1990s. The very young, the old and the immune compromised are particularly at risk. By any statistical measure, the numbers for the recently discovered swine flu are insignificant. It has only gotten any attention at all because a new strain has been identified. Until an infant death was reported today in Texas, the mortality of this flu outside of Mexico was zero and it would be reasonable to conclude that this new flu is much less risky than the ordinary strains we have to deal with every winter. The U.S. medical establishment's record of handling of swine flu in the past is also rather tarnished to say the least. A vaccine to prevent it in 1976 (the disease never really showed up despite dire warnings of impending peril - there were only 200 cases and one death) killed and crippled far more people than those who got the disease. It was thought at the time that the deadly 1918-1919 flu pandemic was swine flu. It was not, it was a type of avian flu.

Probability always needs to be taken into account when deciding what action to take. Worrying about risks that are minimal are a waste of time. People make the same mistake when investing. Their view of risk in the market tends to be highest at the bottom when this risk of losing money is actually minimal and lowest at the top when the risk of losing money is the greatest. Successful investors look for opportunities where the probability of winning is over 50% (if it is under 50% you are gambling and not investing). The higher your chances of winning are above the 50% level, the better. Over time, you will ultimately make money with this strategy, just as gamblers ultimately lose because they deal with probabilities of less than 50%.

The GDP report this morning was dismal to say the least. Analysts had expected a drop of 4.9% and the number came in at 6.1%. The drop in Q4 2008 was 6.3%. This is the first time since the deep recession of 1974-1975 that GDP has declined three quarters in a row. Highlights from the report: Exports collapsed 30 percent, the biggest decline since 1969, the decline reduced GDP by a record 4.06%; Investment by businesses tumbled a record 37.9 percent in the first quarter, while residential investment dived 38 percent; Business inventories plummeted by a record $103.7 billion in the first quarter and this lowered GDP by 2.79%. Consumer spending supposedly rose by 2.2% from the very depressed levels at the end of last year. I am skeptical of this however, but then again I am skeptical of many things - and for good reason.

NEXT: Markets Rise Depsite Swine Flu Scamdemic

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

A Black (Plague) Friday for Retail

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Profit for most U.S. retailers is determined by sales from the day after Thanksgiving (known as Black Friday) to the end of the year. There is an old saw in the trade that retailers actually lose money up to Thanksgiving day, and that shopping the next day determines the tone for the holiday season. As of now, that tone looks like it's going to be pretty cacophonous. Retail sales are being hit by a negative wealth effect caused by declining home and stock prices and a reduction in employment and available consumer credit. Without a good holiday shopping season, a wave of retail bankruptcies should be expected next spring - and this is one industry the Fed is not likely to bail out.

This past spring there were eight mostly mid-size retailers that went under, including Sharper Image, Levitz, Fortunoff and Linen 'n Things. In July the department store chain Mervyns declared bankruptcy and on November 11th, Circuit City. Crushing debt levels accumulated during the credit craze days in the early 2000s is what led to the first bankruptcy filings. The high debt load, which is common throughout the industry, combined with a tanking U.S economy will be responsible for the much bigger number of retail failures next year. The set up for Black Friday is bleak. In October, the consumer confidence figures were the lowest on record, literally falling off a cliff. Consumer spending plunged 1%. Same store sales were the worse in 35 years, with apparel retailers generally suffering the most. Discounters, such as Walmart did well however.

Don't expect relief from home prices or the stock market either. The just released Case-Shiller report has U.S. home prices falling 16.6% year over year in the third quarter. The stock market may close the year with the biggest drop on record, although it's too early to make that call. S&P 500 earnings were estimated to be down 21% in October, with financial and consumer discretionary firms bearing the brunt of the losses. Amazingly, brokerage analyst earnings estimates for 2009 have S&P profits increasing 17%, even though many of their own companies are only surviving because they are on the government dole. Recent reports have also indicated hefty outflows from mutual funds, close to 20% of the total so far this year, with investors increasingly losing confidence in the U.S. stock market.

Historians estimate that there was a 35% chance of surviving the bubonic form of the Black Plague during the Middle Ages. Hopefully, the survival rate in U.S. retail will be higher than that. Even healthier chains are closing large numbers of stores however. This pattern is likely to accelerate further and not just because of the bad economy. Rising real estate values have increased rents and have made the break even point for profit much higher than it used to be, just as sales are falling. The Internet of course, offers a cheaper alternative. Expect a lot of empty stores in the future. Also a lot less jobs in the industry. This in and of itself has major implications since retail is the largest employer in the private sector.

NEXT: When Silence Isn't Golden

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

U.S. Economy Slides Deeper Into Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

As you go back in time until the mid-1970s, you will find that each U.S. recession was worse than the previous one. The 1973 to 1975 recession was the biggest economic downturn in the U.S. since the Great Depression in the 1930s. Next was the 1980/82 recession (actually a double dip recession) and then the 1990/91 recession. The 2001 recession was the mildest on record and the only recession in history without a drop in consumer spending (only possible because the Fed dropped interest rates to 1% and financial companies were willing to provide almost unlimited amounts of credit to U.S. households at slightly above zero interest rates). To get a grasp of what is going on in the U.S. economy now, it is helpful to note statistical comparisons to time periods when past recessions existed and this will give you some sense of how badly the U.S. economy is currently functioning.

One thing that will most certainly not give you a sense of how the economy is functioning is the official GDP figures from the U.S. government. According to these, economic growth in the second quarter was robust at 3.3.% (final revision has since reduced this number to 2.8%). The first GDP figures for the third quarter will be released in late October. Anything indicating less than a sharp decline should be considered to be just as fictional as the second quarter report. No matter where you look, current economic reports are dismal and levels being reported are similar to those reached in one of the previous U.S. recessions.

Retail sales, Employment and Housing Starts are each indicating that we are in a significant economic downturn. Consumer spending represents over 70% of the U.S. economy and has likely fallen for the first time since the 1991 recession based on retail sales dropping 1.2% in September and 1.0% in August. Private economists have extrapolated the retail sales figures to an estimated 3.4% drop in consumer spending in the third quarter. Considering the employment situation, don't expect consumer spending to improve any time soon either. There have been job losses every month in 2008, with the official total being 760,000 (the actual figure is much higher). Even this number would be much worse, except the 2008 employment reports indicate continual hiring in the categories 'government' and 'education' , which in itself is mostly government employment. As of September, there were 2.2 million more unemployed in the U.S. than there were a year earlier and this number keeps rising. Housing, which is dependent on both jobs and credit availability, has continued to fall off a cliff. Housing starts fell a further 6.3% in September to an annualized rate of 817,000 units (this figure was around 1.7 million at the top of the bubble). Once again this was the lowest rate since the 1991 recession.

Industrial production provides an even worse case scenario for the economy than the consumer related reports. Industrial production, which represents the output of U.S. factories, mines, and utilities, fell 2.8% in September, after a 1% drop in August. The September drop was the worse since December 1974. Like consumer spending, industrial production is not adjusted for inflation, so this should be taken into account. According to the September PPI eport there was a price drop of 0.4%, although the core rate went up 0.4% in producer prices (consumer prices were flat for the month). Almost all of this price drop took place because of falling oil prices. Since oil has already fallen over 50% since its July high, continual drops should not be counted on. Examining some components of the PPI report also indicate drops bigger than even those of 1974 - a time of deep recession combined with high inflation, which is very much like the current U.S. economic picture.

NEXT:

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.