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.

The State of the Union for Investors

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.


We live in extraordinary times. The U.S. economy is at risk of veering toward a multi-year depressionary state or experiencing a massive bout of inflation. Based on president Obama's State of the Union address last night, investors should still be worrying about both possibilities.

The impact of the global Credit Crisis that began in 2007 has been deep and prolonged so far. It was met with extraordinary government action in terms of spending and in pumping liquidity into the financial system - both of which are inflationary in the long-term. Despite these efforts, economic recovery in the U.S. has been tepid and elusive so far. This has not stopped our leadership from taking credit for 'saving us from another depression' despite the lack of evidence to support this view. On a number of economic fronts, the situation has continued to deteriorate, but Washington continues to congratulate itself on its great performance. The State of the Union address with its almost uninterrupted applause for a long litany of meaningless political platitudes provides the perfect picture of just how out of touch Washington is and how oblivious they are to their record of failure.

In his speech last night, president Obama emphasized that jobs creation would be the focus of his administration this year. For those with short memories, this was also stated as the prime focus of the White House in January 2009. The U.S. unemployment rate was 7.2% at that time and the claim was that if congress didn't pass the proposed $845 billion stimulus package, unemployment would reach double digits by the end of the year. Democrats said they emphasized government spending over tax relief in the bill because that was the best and fastest way to create jobs. Well, congress passed Obama's package, really a massive giveaway to a number of special interests, and the unemployment rate was 10.0% at the end of the year.  Based on their own criteria, the White House's 2009 attempt at job creation was a complete failure and a big waste of taxpayer dollars. For some reason this wasn't mentioned in the president's upbeat speech.

By this point, I don't think anyone should expect an honest appraisal from the White House on any aspect of the administration's performance. Obama made a number of negative references in his speech to the much derided Wall Street bailout program, TARP. He stated that it was "about as popular as a root canal" and it was something which "I hated". What was left unstated was that while he was a presidential candidate Obama made phone calls to round up Democratic support for the bill and this was instrumental in passing it and one of the first acts of his administration in 2009 was to get congress to release the second $350 billion allocated in the bill so it could be spent. Imagine what he would have done if he had liked TARP.

Deficit reduction was another item highlighted in the State of the Union speech. Perhaps this was meant as the comic relief - I don't know. Apparently this will start in the 2011 budget. Obama stated that he had already found $20 billion in inefficient programs in next year's budget and would pore over it "line by line" to find even more. The 2011 budget hasn't been released yet, but the budget deficit for the 2010 budget (starting on October 1, 2009) is now estimated to be $1.35 trillion. A savings of $20 billion would reduce the current deficit by less than 1.5% and lower it to only $1.33 trillion. Doesn't exactly look like a big dent in profligate government spending does it?  While this is completely meaningless, Obama also claimed that if his health care program was passed it would result in a trillion dollar reduction in the budget deficit (over a many year period, but that wasn't emphasized). A big spending government program leading to deficit reduction?  Yeah, that can happen. Any investor who believes this should stop investing immediately because you are probably buying stock in the Brooklyn Bridge.

Despite the claims coming from Washington, the recession is not over. The White House, congress, and even the Federal Reserve seem incapable of recognizing this because it would be an admission of failure on their part. At some point it will be recognized however because the American public will insist on it (the message from the surprise upset in the Massachusetts senate race seems to have eluded the White House so far). Modern democracies will always eventually err on the side of more government spending. As we have seen in the last year, this doesn't necessarily solve the problem of a bad economy and thus it is still possible for an intractable depression to take hold. Too much government spending does eventually lead to the problem of excessive government debt though and at some point the debt becomes so high that it is impossible to pay off. That's when intractable inflation shows up. Historically, the worst economic disasters take place when government is most oblivious to these unfolding problems. In that case, Americans have a lot to worry about. President Obama stated more than once in his speech last night "I don't quit". Based on his first year in office, he should have said, "I don't listen".

Disclosure: Not applicable.

NEXT: The Twilight of Ben Bernanke

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.

Oil Up; Retail, Economy and Deficit Down

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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Oil had a huge rally yesterday, going up more than 4% on a bullish storage report. It is still over $72 this morning. The oil/natural gas ratio is over 20 and is at the same high that it was in 1990 when it last peaked. There is about a 20 year cycle to this ratio and it should be falling for the next 10 years or so. We shall see. In the shorter term the natural gas storage report is out at 10:30 this morning (New York time). Natural gas can be bought either with the ETF UNG (which is being harassed by the regulatory authorities) or with the ETN GAZ. Natural gas futures are in extreme contango.

The stock market is trying to maintain its rally, which is supposedly dependent on the coming economic recovery. Sears Holdings, which released its Q2 earnings this morning, is going to be a drag on the rally today. The company lost 17 cents last quarter. Analysts expected a gain of 35 cents. Revenue fell 10.3% and was also below expectations. The company's credit rating, which was already in junk territory, was lowered further today by Moody's. Although the financial picture of this major retailer is nothing short of disastrous, the stock has risen 80% this year as of yesterday. At least it is down this morning. This company typifies the market rally - a huge rise in the midst of really bad fundamentals. Who would buy under such circumstances and why?

Weekly job claims also rose this morning to 576,000. This is still deep in recession territory. The rule of thumb for years has been weekly claims at or above 400,000 indicates the U.S. economy is in recession. A healthy economy has weekly claims around 300,000. The market had a good rally a couple of weeks ago when claims fell to 550,000. The "better numbers" were heralded in the press and claimed to be an indication of the waning recession. The press should have waited until claims fall and stay below 400,000 before publishing that story (but that would be responsible reporting, so of course that didn't happen). The press also never mentions that a large percentage of the U.S. workforce isn't eligible to collect unemployment, so when these people become unemployed they don't show up in the weekly claims figures.

The "good news" out this morning is that the Obama administration is predicting the federal budget deficit will be only $1.58 trillion this year. This is still almost 4 times bigger than the previous record budget deficit. Some contingency bailout funds for the big banks won't have to be spent (at least by September 30th of this year). Before you trust any numbers from the White House, consider that their argument for the current stimulus package was it would keep the unemployment rate at 8% or lower. Without it they claimed that unemployment could rise as high as 9%! So the stimulus package was passed early this year and so far unemployment has gotten as high as 9.5% - and that is with a lot of manipulation of the numbers to make them look better. You should assume that all the other numbers coming from the administration are just as reliable.

NEXT: Natural Gas Deconstructed

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.