Consumer Spending Hits A Speed Bump In September

Many experts believe the recession is past, but this optimism is not reflected in consumer spending. Unemployment concerns are still plaguing consumers and the persistent lack of public confidence in the economy is reflected by this month’s drop in consumer purchases. See the following from Expected Returns.

From Bloomberg, Consumer Spending in U.S. Declined in December:

Spending by U.S. consumers fell in September for the first time in five months after the government’s auto-rebate program expired.

The 0.5 percent decrease in purchases matched the median estimate of economists surveyed by Bloomberg News and followed a 1.4 percent jump in the prior month, Commerce Department figures showed today in Washington. Incomes were unchanged, while the savings rate climbed.

Stagnant wages and concern over mounting unemployment are causing confidence to wane, raising the risk that consumers will retrench in coming months as government assistance programs run out. The report also showed inflation was lower than the Federal Reserve’s long-term projection, indicating the policy makers can keep rates low.

The persistently weak unemployment picture and stagnant wages help explain the "surprising" slide in confidence in October and the drop in consumer spending. With the recession now apparently over, shouldn't consumer spending be rising dramatically?

The Keynesian economists that champion the usage of debt to stimulate economic activity using esoteric, but flawed, arguments about stimulating "aggregate demand" are not focusing on the tremendous debt overhang that is inherent in our system.

Hangover Effect

Autos in October probably sold at a 9.85 million pace, down from an average 11.5 million rate in the third quarter than reflected the boost from ‘cars-for-clunkers,’ according to the median estimate of analysts surveyed by Bloomberg News. Purchases averaged 13.15 million in 2008.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 7.2 percent last month after increasing 6.7 percent in the prior month.

So essentially, even with all this government stimulus, consumer spending has been flat the past couple of months. In a genuine recovery, the government wouldn't even have to think about stimulating the economy since private economic activity would, by definition, be growing. The only thing that is growing right now is government spending, and I will continue to say that this trend is not sustainable.

This post has been republished from Moses Kim's blog, Expected Returns.

America's Desire To Save Money Getting Stronger

As Americans continue to reduce their consumer debt by billions of dollars and with personal savings rates rising to the highest levels since 1998, Tom Dyson says that cash may be the best investment opportunity in the U.S. right now. By the end of 2010, it is estimated that Americans will have paid off approximately 13% of their outstanding credit card debt. See the following article from Daily Wealth for more on this.

"We've never seen this aggressive paying down of debt before," said a banker in the Financial Times last week. "Once you slap households in the face... it sticks."

Each month, the Federal Reserve calculates and reports the total amount of consumer credit outstanding in America. This is the money Americans have borrowed to pay for cars, vacations, education, and refrigerator-freezers at Wal-Mart.

When this number rises, it means credit is easy and Americans are in consumption mode. They're buying SUVs, houses, flat-screen TVs, granite countertops, and stainless-steel appliances. And they're borrowing money to make these purchases – often using credit cards – so they're not worried about finances.

When this number falls, Americans are in thrift mode. They prefer saving money and paying off debt to shopping at the mall and going on vacation.

Despite the improvement in the economy and the bounce in the stock market, the American desire to save money seems to be getting stronger...

In the last year, American consumers have reduced their outstanding debt by more than $100 billion, according to the Federal Reserve's data.

In July, Americans reduced their consumer debt by $21 billion... the sixth monthly decline in a row and the largest monthly drop in borrowing ever recorded.

The report for August came out earlier this month. It showed American consumers paid back another $12 billion of their outstanding credit, the seventh monthly decline in a row. At this rate, Americans will have paid off 13% of their outstanding credit-card balances by this time next year.

Not only are Americans paying off debt, but they're saving more money...

Each month, the St. Louis Fed publishes America's savings rate. This is the percentage of disposable income Americans choose not to spend.

In 2005, the personal savings rate fell to less than 1%. This year, it has averaged 4.1%. The last time it averaged more than 4% for the year was in 1998.

Here's the thing: While demand for cash in America soars, investors have been dumping it from their portfolios as if it were venom...

This year, cash has fallen...

60% in terms of Russian stocks
55% in terms of lead
53% in terms of coal
50% in terms of copper
40% in terms of Internet stocks
33% in terms of sugar
17% in terms of gold
16% in terms of the S&P
13% in terms of cotton

The terrible sentiment and Americans' new attitude toward saving make cash the most contrarian investment opportunity in America right now.

In tomorrow's essay, I'll show you one of my favorite ways to invest in cash...

This post has been republished from Daily Wealth, an investment analysis site.