Personal Spending Outpaces Income

Well, the happy morning for the commodity currencies turned sour on the day, as the risk assets all got slapped around by the markets. The risk assets went sour after the personal income/spending data printed…

Say it ain’t so, Joe!

Is this a case of “here we go again?”

Here’s the skinny of what I’m talking about… Yesterday, personal income printed at 0.2 less than personal spending! So… Are we back to spending more than we make? I sure hope not… But, that sure seems to be the bill of fare here. I have to say that I’m not surprised that the US consumer continues to spend during the recession and labor depression that we have, for this is the main reason I’ve said that this will be the difference between Japan’s multi-year deflation, and the US… However, I am surprised at how strong that spending is…

Personal spending rose 0.4% in July, personal income rose 0.2%, and the savings rate dropped to 5.9%… And if you adjust the personal income data for inflation, and taxes, incomes dropped 0.1%… Those aren’t good numbers, folks… And once again, the “bad data for the US” is a call to the markets to sell risk assets… I’ll never agree with this trading pattern thought up by the mental giants of the markets… I think too logically for that to happen!

Over in Germany this morning, unemployment dropped for a 14th month in August, declining by 17,000, keeping the unemployment rate at 7.6%. This is good news for Germany, the largest economy in the Eurozone, and it looks as though it just might continue for some time. An economist at ING in Brussels said, “Looking at order books of German companies, we’ll see this miracle continue at least this year, and that’s all we need for a self-sustained recovery in Germany.”

While we’re on the subject of data overseas, did you see the strong second quarter GDP report that printed in India? India’s economy grew at the fastest pace in 2 1/2 years in the second quarter to the tune of +8.8%! Add that to the first quarter’s growth of +8.6%, and you’ve got yourself one strong economy! One would expect interest rates to continue to move higher here… Did you know that exports only account for 1/5th of India’s GDP? So… If the US economy is flopping around like a fish just brought into a boat, and Japan’s economy is trapped in the basement, it doesn’t hurt India… The key here? Domestic demand… Ooooohhhhh, would that be nice to wake up to here?

I know I’ve just crossed streams here, for earlier in today’s discussion I had a problem with the strong personal spending… But, there’s a difference… If personal spending was strong, but personal income was stronger, and the savings rate was strong, then you would have what’s needed to have the proper domestic demand… That’s not the case in the US and hasn’t been for ages.

And keeping with the data overseas… In Australia, we have their second quarter GDP printing tonight, but first we saw the color of July retail sales rise at a 0.7% clip, and July building approvals at 2.3%, (both of these were forecast to be much weaker than they printed) and the current account came in at a negative A$ 5.6 billion, but it was forecast to be A$6.5 billion! These are all good reports, folks… There’s no reason for the Aussie dollar to continue be held hostage by the election results… But it is, and it really ticks me off! The Aussie dollar (AUD) lost 1-cent yesterday… That’s ridiculous!

As I said… Tonight, we’ll see the color of Australia’s second quarter GDP, which I expect to be around 1%… Annualized that would put Australia’s GDP for 2010 at 4% (see Chuck’s new math at work again!)

In New Zealand, kiwi (NZD) got taken to the woodshed overnight when it was announced a Consumer Finance Company was going into receivership… The rumors of this happening had been hanging over kiwi for weeks now, and it finally happened… Should be a one-off hit to kiwi…

And finally with the data… Canada’s Current Account Deficit widened in the second quarter, which is not a good thing, folks… But it’s not catastrophic either… Canada’s deficits widened by C$2.6 billion, moving the overall deficit to C$ 11 billion… Shoot Rudy, $11 billion in here in the US was just spent, while I was writing the Pfennig!

Well, that short discussion we had yesterday, where I speculated that we could be seeing a reversal of the flight to safety, got deep-sixed by the personal income/spending data, and the 10-year Treasury came back strong on the day… UGH!

With the risk assets getting beaten like a rented mule (no animals were hurt here!) the currencies of Switzerland (CHF) and Japan (JPY) were strong on the day and in the overnight sessions. The Swiss franc is within spittin’ distance to 98-cents, and Japanese yen is closing August with a gain versus the dollar, for the fourth consecutive month…

And the Swiss franc is not only gaining versus the dollar, it’s completely out of whack with the euro (EUR) again, surpassing record high after record high versus the single unit.

The US data cupboard has the S&P/CaseShiller Home Price Index printing today… And here’s where I believe we begin to see the home prices drop again… Remember, I’ve said that I expect home prices to drop another 10% before the housing meltdown is over… I do not believe the calls that housing has hit a bottom, and today’s report should be the beginning of the proof in the pudding.

We’ll also see consumer confidence, and the FOMC meeting minutes, which always seem to have a surprise or two in them…

Then there was this… I saw a discussion on TV this past weekend about the Cash For Clunkers (CFC) program that the government sponsored last year… Long time readers know that I was totally against this plan, and that includes the ecology stuff… Well, did you know that because used cars were taken out of the system, that in today’s world, if you wanted to buy a used car, you would have to pay about 30% more for it because of the lack of supply? And it certainly didn’t rescue car sales long term, eh? And the damage to the deficit… Only $3 billion… Well, that’s what I hear the politicians saying anyway!

To recap… The personal income and spending data, which showed that spending was double what was gained on the earnings side, sparked another round of risk aversion, with only the currencies of yen and francs beating the dollar. And there is a ton of data to go through in today’s letter.

Chuck Butler
for The Daily Reckoning