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.

Commodities, the Dollar and More Government Fantasy

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:

The Natural Gas storage report was released yesterday morning and storage was up 54 BCFs versus expectations of a rise of 51 BCFs. Within a few minutes the near term futures contract dropped at least to $2.705 (it may have gone lower). The about to expire contract closed at $2.843 down 6.7 cents from the previous day. The oil storage report was mixed on Wednesday and Nymex oil dropped below $70 a barrel subsequently, but has poked above $73 this morning. The oil/natural gas price ratio has gotten as high as 26 (if they were completely interchangeable, the ratio would be 6, it has averaged 8+ over the long term), well above the last peak of 22 in 1990. Oil is about to enter its seasonally weak period and natural gas its seasonally strong period. Regression to the mean should start taking place this fall.

The calendar should be creating a bullish environment for gold and silver as well. They tend to be strong between August and February. Gold was trading around $960 this morning on Comex and silver around $14.75. Gold has been hoovering just under the key breakout level of $1000 for some time now. Watch it closely. Once this breakout takes place, the short term target price is somewhere between $1200 and $1300.

Gold historically trades counter to the U.S. dollar, but they can become decoupled. In a global inflationary environment, decoupling will eventually occur. For the moment, the U.S. dollar is weak . For the last 6 days, the dollar has traded at least part of the day below its key breakdown level of 78.33. This is the second time so far that the dollar has stayed below this level for several days. When the stock market rallies, the dollar has been selling off and this has been going on since last March (it's not a normal pattern). If stocks rally further, it should kill the dollar. The dollar may tank regardless since the technical picture is weak. The powers that be will want to save it however. So we will have to wait to see what happens.

The stock rally has been explained as taking place because the U.S. economy is recovering. At least in some cases, valuations are as ridiculous as they were at the top of the tech bubble in 2000. Take a look at the Dow's PE for instance. This morning, the government released more 'good news' that seems to fall into the 'that can't possibly happen' category. Personal spending was up 0.2% last month, but incomes were unchanged. Even though incomes were unchanged, total wage income went up (during a time of increasing unemployment). Spending has supposedly been rising for the last three months, well ahead of income, even though the savings rate is 4.2%. Separate reports indicate that available consumer credit has been cut drastically. So even though U.S. consumers don't have the income and don't have access to credit, they are somehow spending more. I really think the U.S. government should release its statistical reports on stationary that has pictures of pigs flying in the background. That way the public would know how much credibility the numbers have.

NEXT: A Break in the Bull and China Stops Shopping

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.