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.

The Cash From Clunk-Heads Program

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 U.S. Cash for Clunkers program seems to be working quite well in reviving the economy - not the U.S. economy, but the Japanese economy. The U.S. government program that uses taxpayer money to let people who foolishly bought gas-guzzling cars trade them in for newer energy efficient models is just another reward the losers, from the losers Credit Crisis program. Yesterday's trade deficit figures tell the story. The July deficit widened by a whopping 16.3% in one month. The reason for this huge increase? Auto and auto part imports increased by 21.5%.

A widening trade deficit is negative for GDP. Yesterday's figures knock down one of the three pillars of economic recovery that mainstream economists have cited for their prediction that the U.S. recession is over (almost 100% agree that the economy is recovering). Actually, they specifically said exports were increasing, which indeed was the case in yesterday's report (thanks to highly volatile civilian aircraft shipments). Unfortunately, imports increased much more. Even though this subtracts from GDP, the press managed to put a positive spin on it. One well known economist stated "This was a positive report in that it provides further evidence that both the U.S. and foreign economies are coming back." Something that makes GDP decline is good news for the U.S. economy? Since when? There is obviously no absurdity that the mainstream media won't publish.

Of course the stock market went up on this 'good' news. Cash for Clunkers is indeed reviving manufacturing activity within the U.S (manufacturing is only 20% of the commercial economy versus 80% for services). You can see the figures have improved the most in industries related to automobiles. What one hand giveth, the other is taking away however (as seems typical of Obama administration initiatives). Toyota and Honda have been the two biggest beneficiaries of the program. Once the program stops though, you can expect manufacturing to decline again until the U.S. government comes up with another stimulus program (and another ... and another). The third pillar of the economic recovery, rising homes sales and prices, is just not believable. Foreclosures keep rising, housing inventory keeps rising, consumer credit and income keep falling, yet people are rushing to buy homes and paying more for them? It's only likely in the fantasy land known as manipulated statistics.

The U.S. is not the only country engaging in economic stimulus, it's a global phenomenon (the British also have something they call a 'Car Scrappage Scheme' by the way - at least they used the word scheme so people know what is actually going on). The Chinese market had a big rally last night after China said industrial output, investment, loans and retail sales remained strong in August, "supported by colossal stimulus measures" (a quote from one of the news services). The world's economies seem to be following the Japanese model. In the last two decades, Japan tried to repeatedly revive its economy through stimulus programs. In some cases, quarterly GDP growth exceeded 10% on an annual basis (an enormous number). However, every time the stimulus was removed, the economy sooner or later sank back into recession. There is one major difference however. Japan entered its stimulus period in a strong financial condition, whereas the U.S. and Britain were extremely overextended at the beginning of the Credit Crisis. Our stimulus plans will have to be paid for by printing money.

NEXT: Gold Closes at Record High

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.