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Monday June 2, 2008 - 01:25:35 GMT
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The Crux of the Matter

The American consumer is a bit of a mystery. He and she are routinely lauded as the backbone of the American economy. They are the group whose spending decisions make up 70% of US economic activity. This is the individual whose desires are the focus of myriad trend analyses, whose mood is continually assessed by pollsters and whose mind is plumbed by countless surveys. And yet, this humble individual, (you and I of course), standing on line at Starbucks for a $5.00 latte or filling the car with $4.00 gas or buying toys for children or groceries seems to posses reserves unfathomed by the economics community. Unemployment goes up, house prices fall, consumer sentiment plummets and our neighbors (and ourselves) continue to live our lives as if very little has changed. Well, perhaps it hasn’t.

One key to consumer behavior is optimism. People are very reluctant to change their way of living. A 10% reduction in their home value does not translate into a 10% or even a 1% reduction in spending. Inflation, while painful, is incorporated into the family budget; spending drops but as little as possible. Only when there is no money to be spent, that is when people lose jobs, does consumer spending move dramatically lower.

The United States unemployment rate is 5.0% and has risen half a percent in a year. Weekly jobless claims have added 50,000 to the four week average since January. These numbers are poor in comparison to what went before but they have not brought serious cutbacks in American consumer spending.

In the European Monetary Union (EMU) the unemployment rate has been steady at 7.1% since January, a slight improvement over last year. It was at 7.2% and 7.3% for most of the third and fourth quarters of 2007. A respectable performance considering the economic situation.

But the monthly average for European Retail Sales gained only 0.27% in the third quarter of 2007. In the fourth quarter it fell 0.5% and lost a further 0.03% in the first quarter of 2008. With declining unemployment and a social support system far more generous than in the United States European consumer spending fell even as employment increased.

Contrast the reaction of the American consumer.

Monthly Retail Sales in the US over the same period added an average 0.1% in the second quarter of 2007, 0.5% in the third and 0.13% in the fourth. Only in the first quarter of 2008 did consumer spending contract 0.03% per month. In April Retail Sales fell 0.2%.

When we look at Retail Sales ex auto, that is, without car purchases, we see an even more pronounced example of the resilient US consumer. US gasoline consumption per capita is the highest in the world and gas prices have a large impact on automobile purchases. In Q2 of 2007 the average month gain in Retails Sales ex auto was 0.33%, in Q3 it was 0.1%, in Q4 0.47% and in Q1 2008 it was 0.23%. The rise in April was 0.5%. Aside from car purchases and in the face of falling home values and rising unemployment the US consumer remains optimistic. Or to put it another way, American individuals and families have not seen the need to change their way of life.

US Durable Goods Orders over the past year exhibit a similar pattern. These are items that have a normal useful life of more than one year. The overall results have slowed since last April. In the second quarter of 2007 the monthly average was -0.13%, in the third it was -0.3%, in the fourth +1.63%, in the first quarter of this year -2.3% and in April this year it was -0.5%. But when transportation sales are removed the results are quite different: Q2 2007 is flat, Q3 is +0.73%, Q4 is +0.4%, Q1 2008 is -0.9% and April is +2.5%.

The meaning is plain. The consumer has cut back on large purchases, the primary economization being automobiles. The greatest contraction in spending has been in the first quarter of 2008. But consumers have not inhibited their overall spending to anything like recession inducing levels.

Or take another widely followed indicator, Personal Consumption Expenditures, (PCE). Over the past year the monthly average has been positive every quarter: Q2 2007 +0.2%; Q3 +0.43%; Q4 0.53%; Q1 20078 +0.3% and April 2008 +0.2%.

Is there another explanation or partial reason for the continuing refusal of the American consumer to facilitate economic theory? Perhaps the US consumer has more money than is officially recorded. The US economy has changed dramatically in the past 20 years. New ways of working have evolved. New sources of employment and new avenues of income have cascaded from the internet information economy. To take one example, eBay has provided millions of Americans with secondary or primary income that is largely outside official government statistics. Home employment and part time work have also blossomed in the past decade. All of this employment may provide substantial income for the consumer, econometrics is just not sure.

But, say the economic doomsayers, American Consumer Sentiment numbers are dismal, the lowest in a generation. That is true. The Conference Board Consumer Confidence reading was 57.2 in May, a 46% drop since last April. The University Of Michigan Consumer Sentiment number for May was 59.8 “the weakest reading since the recession of 1980”, was one breathless comment. And that also is true. But is it the whole story?

Is it possible that consumers say one thing and do another? Let’s try another tack. When you (or myself) are phoned for a survey, we try to sound informed and intelligent in our replies. And how are we informed? Our answers come from a combination of personal experience and media economic reporting. Gas prices are high and we wish they weren’t. That is a personal observation and it is a negative one. In the media one could easily go an entire week without finding a single positive commentary on the economy. So when asked by a pollster it is not surprising that our official or public view is negative, we are downbeat; the future for the US economy looks grim. But our behavior tells a different story.

Consumer sentiment is nice but keeps your eye on consumer spending numbers. The recession isn’t here until the closed pocketbooks and wallets of the American consumer say it is.

Joseph Trevisani
FX Solutions
Chief Market Analyst

[email protected]


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