Consumers Spending on Things They Need... And Not Much Else

We couldn’t help but chuckle at the following headline: “US Retailers and Suppliers See Consumer Spending Bouncing Back.”

Here we go again. A survey by CIT indicates that “consumer spending is better than last year and gradually making a comeback.” In fact, “US retail spending may return to 2007 levels by late next year.”


It’s not that we bear ill will toward retailers. Rather, we’re bothered by the fact that consumer spending has long, if erroneously, been the Holy Grail of the American School of Economics.

“Saving” since the 1980s has not been about how much you have in the bank, but how much less you spend on something you’re already buying. “Investing” during that same time has become an exercise in flipping stocks…rather than an effort to use capital to produce some “thing” for a profit.

“Consumer spending” has become the metric an economist uses to measure how quickly one is willing to part with his paycheck.

A closer look at Commerce Department numbers reveal what a chimera the CIT headlines are. The following items account for most of the increase in retail sales…

  • Gasoline: Up 1.9%
  • Food: Up 1.3%
  • Clothing: Up 1.2% (back-to-school time).

Retail sales numbers measure dollar figures, not quantity or quality of goods.

In August consumers were spending more on things they have no choice but to buy. In contrast, purchases of electronics – discretionary items that keep falling in price – fell 1.1%.

The “core” inflation rate for people who don’t consume food or energy was flat from July to August. But for the rest of us, it rose 0.3%. Food prices rose at the fastest pace since April. Commodities, as you’ll see in a moment, are beginning another run at historic highs.

Meanwhile, real consumers polled by Gallup say they spent $63 a day on average during August – down $5 from July and down $2 from August a year ago.

US Average Daily Spending

That covers spending in stores, restaurants, gas stations and online.

In theory, the retail numbers driven by food and energy “would lend credence to the view that consumer staple stocks should be outperforming consumer discretionary,” says David Rosenberg, chief economist with Canada’s Gluskin Sheff firm.

But in practice, “Over the past month, consumer discretionary stocks are up over 6% and staples by only 3%, so if there is a pint of contrary blood in you and you are looking for a possible anomaly to take advantage of in the equity market… there you go.”

At the same time, the Census Bureau reports the inflation-adjusted income of the median US household in 2009 was $49,777 – a 4.8% drop since 2000.

That “inflation-adjusted income” reading is even worse than the historic, game-changing inflation of the late ’70s, when household incomes still eked out a 1.2% gain.

“‘Consumer spending’ is facing a powerful, lasting head wind: the trend toward frugality,” says our stock market vigilante – and editor of Strategic Short ReportDan Amoss, who’s got more than a pint of contrary flowing through his veins.

“Most US households need to repair their balance sheets after years of overextending on credit. With the economy weakening rapidly, it’s only a matter of time before consumer discretionary stocks take another hit.”

Addison Wiggin
for The Daily Reckoning