Can the US consumer carry us all?

The US consumer is back, defying the odds and me. Last night we had October retail sales and results were good. From Calculated Risk:

On a monthly basis, retail sales were up 0.5% from September to October (seasonally adjusted, after revisions), and sales were up 7.9% from October 2010. From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $397.7 billion, an increase of 0.5 percent (±0.5%) from the previous month and 7.2 percent (±0.7%) above October 2010. Total sales for the August through October 2011 period were up 7.6 percent (±0.5%) from the same period a year ago. The August to September 2011 percent change was unrevised from +1.1 percent (±0.3%).Retail sales excluding autos increased 0.6% in October. Sales for September were unrevised with a 1.1% increase.

This follows the less dire reading in consumer confidence late last week:

So, is this sustainable? In one sense yes, in another no. First the good news. This demand appears to have caught producers off guard, or, they have been managing inventories rather well. The September wholesale inventory number last week was low and the inventory sales ratio is also subdued:

This suggests that the unexpectedly strong (relatively) demand, will have to be met with an upswing in production rather than existing stocks. In turn, we could see extra jobs created that will add to the Christmas hiring season that has already matched pervious years. Also from Calculated Risk:

I can see this mini-cycle continuing to make a small dent in unemployment (as well as support Chinese exports through year end). It is, not, however, a resilient bounce. And here is why. Check out these personal finance charts from the US Department of Commerce:

Personal income growth is running at about 3%, below inflation. Note as well that personal savings have begun to fall. Outside of cars and student loans, consumer credit has fallen in the last three months so I conclude that the current round of consumption is funded largely from a savings rundown, following the big spike post GFC. We’ve been here before, of course, and such cycles can run for longer than anyone expects so we can’t discount that possibility.

But there are a range of headwinds. Yesterday I discussed the likely fallout from the developing European recession and the hit to the US’s $380 billion or so in exports to the Continent. But there are other problems ahead too. From Nomura via Alphaville, following are the scheduled fiscal drags for 2012/13:

Discretionary spending caps resulting from the debt ceiling agreement, troop drawdowns, and small expiring tax provisions at the end of 2011: $69bn, or 0.5 per cent of GDP.

Expiration of payroll tax holiday at the end of 2011: $112bn, or 0.73 per cent of GDP.

Expiration of extended unemployment benefits: $56bn, or 0.37 per cent of GDP.

Expiration of Bush tax cuts at the end of 2012: $238bn, or 1.5 per cent of GDP.

That’s a total drag of about 1.6 per cent of GDP for 2012 and 1.5 per cent for 2013.

Nobody has a clue about how much of this will either get negotiated away or get locked into some new debate about fiscal responsibility. But the projected cuts continue to stand as an imminent austerity package. Reuters carries an interesting debate between Paul Krugman and Larry Summers on the likely outcome. Summers thinks the Washington will get over itself. Krugman does not.

In balancing these internal and external risks, the San Francisco Fed has produced a new evaluation of the likelihood of the US succumbing to recession next year. And here it is:

The combination of these two recession coins, shown in the combined risks line of Figure 2, is quite disconcerting. It indicates that the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.

I’ve highlighted the key paragraph. As my above analysis shows, I doubt the US economy can withstand another shock of any magnitude.

Houses and Holes
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  1. Yes, they are running down their savings to deal with commodity price rises. A typical Thanksgiving meal is 13% more expensive than last year. Retail grocery prices are up 6.3% on last year.

  2. Goldman says:

    Large gains in sales for electronics and “non-store” retailers (online shopping) suggest that the introduction of Apple’s latest iPhone likely accounted for much of the upside surprise to core retail sales.

    An iPhone-led recovery?

  3. The ceridian index has also shown signs of life last month, so there is some confirmation from other sources, although it is well off the 2008 highs.

    What intrigues me is that the graph shows retail sales and gasoline sales are now above pre GFC levels, and the trend line is steeper than pre gfc, so the direction seems to be clear.

  4. The great thing the US has going for it is the growth in the tech sector, and the return of manufacturing from Asia. Sadly, we have neither in Australia.

  5. the US economy is improving and this is a far more important development than the sideshow that is eu soverign debt. for the first time in 3 years the US economy is standing on its own 2 feet with QE2 finishing in June and NO double dip.

    a genuine US economic recovery (and this is what this looks like) will drive corporate earnings and solid shre market returns for the next few years.

    • Well its important, and its good news, but the ongoing Eurozone crisis is hardly a sideshow. Do you really expect people to take your comments seriously when you say things like that?

      • it is a sideshow lorax. just look at the sharemarket to see what it cares about most. some sovereign debt issues in europe that will have next to ZERO impact on corporate earnings or economic recovery in the worlds largest most important economy? the XJO has hit 3 month highs and is now 500 points higher than its august low, while the eu sideshow has gone from bad to worse so you tell me whats important then?

        i dont really care if people dont take me seriously. you wouldnt take half the people in this comments section seriously anyway. No one took me seriously in september either when i said we were on the verge of a substantial bear market rally

          • H&H why would you pay attention to credit markets when you are buying stocks with zero or very little debt? this isnt 2008 when everyone is highly geared so the impact of whats going on in credit markets is negbligable. especially eu credit markets.

            XJO just went through 4300 and i dont think its coming back this time.

          • XJO just went through 4300 and i dont think its coming back this time.

            Less than an hour after you typed this the XJO was back at 4279.

            Just sayin’

            IMO if Italy or Spain see their bond yields blow out above 8% over the next few weeks, then the XJO will be closer to 4000 than 4500.

          • “Less than an hour after you typed this the XJO was back at 4279”

            Hmmmmm, seems to be the case, thanks for reminder. lots of short selling at 4300 by the looks of things. have seen it all month as the shorts reckon 4300 resitance is a good place to load up. i reckon they are mad.

  6. On a different note, it shows, contrary to opinions around here, that negative RAT rates lead to a decrease in savings and more consumption. The immunity of the savings rate to lower interest rates is a purely short term phenomenon.

    Peter How long can the US go on bleeding their savers and older generation of everything in order to maintain the consumption.

    The whole problem of trying to restore consumption to pre GFC levels, at any cost to the society, is to try to restore the unsustainable.

    None of my opinions here alter the question as to whether the US Share Market may be a good place to store some money for the next year or so.
    However GB to suggest the US is standing on its own two feet while it has 9% unemployment, still runs massive CAD’s, and has to borrow from the rest of the world, is a stretch.

    • However GB to suggest the US is standing on its own two feet while it has 9% unemployment, still runs massive CAD’s, and has to borrow from the rest of the world, is a stretch.

      It is the inability to grow at normal interest rates that is the problem, IMO. Seriously, how far do you think Bernanke would have to raise the cash rate before the next crisis happens?

      • Yep Sherlock….Less than 0.1% 🙂 Any notion whatsoever that interest rates may rise, even 30 years out, will unravel the whole wooly jumper!

    • unemployemnt is a lagging indicator and will start to fall.

      anyway its one step at a time. you guys want the whole world to be fixed “right now” and thats not how it works.

      ending QE was always the first step to normalising conditions. its happened and you havent even realised it. better luck next time.

    • Flawse – yes low interest rates do encourage spending and discourage savings by lowering rewards. It also costs the elderley who need the interest on their money to meet living costs.

      I can’t deny any of that.

      I’m not trying to be an apologist for the US – but they will do what they think is best for the majority, and the elderley have less political pull.

      Over here, we can but watch.

      • Peter it WAS a question not taking a shot. All these things can go on much longer than I think they can….at least that is my experience of life. I keep thinking ‘This stupidity has got to stop’ but it DOESN’T!!
        So I was really wondering if you had a suggestion on time frame. I reckon it is too hard a question anyway.

  7. GB what we think about the share market and what we do to try to make a quid is very different to what we think OUGHT happen to build a long-term sustainable economy.

    It’s one of the great mis-apprehensions of the US…a strong share market equals a strong US….baloney.
    At zero interest rates everything in the world is worth infinity.

    • “At zero interest rates everything in the world is worth infinity.”

      Yah, they can print as much money as they want for free. And they’re buying up a lot of Australia while they can buy it for free.

  8. I have next to no idea what the stock market is likely to do. It appears to me that most trading is based on mimicry – that is, when possible buyers can see others buying, they also buy. And the converse applies.

    When expectations about the future undergo significant revision, willingness to buy changes. So it is always useful to try to work out what is likely to happen in the future. But in a sense this is not helpful in a day to day sense in the market, where it is much more relevant to be able to observe and make deductions about what is actually happening in the present, in real-time trading.

    GB is obviously good at this and has a lot of self-confidence – both necessary attributes in a good trader.

    But this is absolutely not the same thing as forecasting the economy…(imo)….

  9. It is funny how the MSM pundits and certain bullhawks latch on to both the “US is recovering” and “We are decoupling from US/Euro” meme.
    If the US is recovering, why is it good news for Austraila, when our economy has supposedly decoupled from the US?

    • Who can forget that memorable Pascoe line: “One more time for the dummies. We are not part of the US economy.”

      • Yeah, it’s a classic. “We are not part of the US economy” and “we are not part of the EU economy” and let’s just ignore the importance of those economies to the Chinese economy that we definitely are part of.

    • Because the MSM has an answer for everything!

      They would twist a Nuclear Warhead going off in Canberra as a good thing for the country……come to think of it.

    • In fairness “we are decoupling” is not the same as “we have decoupled”. The influence of the US is nowhere near what it used to be, but it still has some influence. US demand for China’s consumer products gives the Chinese money to pay for our iron ore.

      • Not to mention that the EU is China’s biggest export market. But apparently we’re in no way affected by what goes on in Europe.

      • But in the context where MSM uses the “decoupling” meme, they go on to imply this process is complete by saying we worry too much about US/Euro going belly up when our saviour is China.

  10. Jumping jack flash

    When banks run the show long enough everything gets turned upside down.

    seems to me that they are simply spending savings. And why not? As mentioned above, with a cost of living inreasing at up to 13% it makes little sense to save at the low rates the average consumer could get.

    savings are an unnecessary liability to a bank when they can source money straight from the pockets of the taxpayer whenever they put their hands out.

  11. The elephant in this room, is that the USA is 2 different economies. One of them has no urban growth restraints, never had a housing bubble or unaffordable housing, and consequently has always had very substantial “discretionary income”.

    See the graph on page 5 HERE:

    Now that the US Federal Reserve has slashed interest rates, THAT part of the USA is ROCKING – LOW property prices AND low interest rates. Pay off your 1st home in 7 years. I am not kidding, this is an “average” reality in many US cities today.

    Meanwhile, the inflated property prices that were the CAUSE of the problem, in California, are STILL too high for recovery to occur in that State, even if they have dropped 30%, after having inflated 100%. While the Federal Reserve is vainly trying to resuscitate that market, the non-Greenie cities will be raking in the “share of business” nationally and probably globally as well.

    An OECD Report from early 2010 SAID:

    “….An additional difficulty for
    large countries and monetary unions is that housing market developments usually differ across regions or
    member countries. For example, during the latest housing boom, while prices were soaring in States like
    Florida or California, they were stagnating in many other parts of the United States. In the euro area, prices
    were skyrocketing in Spain and Ireland, but declining in Germany. Devising an appropriate monetary
    policy response to asset price developments under these conditions is not easy….”


    • The same section of the OECD Report also said:

      “…..Another concern is about the ability of monetary policy to thwart the development of a housing
      bubble without causing widespread damage to the rest of the economy. In a house price boom, prices
      increase strongly – often at double digit rates – and expectations of future prices are similarly upbeat.
      Under these conditions, large policy rate hikes would be necessary to cool housing markets. High interest
      rates would crowd out sound and socially useful investments……”

      I wonder when the Aus Federal Reserve will “get it”?

      • Phil, I was thinking this, on the one hand dropping interest rates is the right thing to do for the exchange rate and exports and on the potentially further impedes our housing market from becoming more productive in real terms. I was going to say planning policy needs to be more integrated with fiscal. But you almost need one RBA rate for private sector housing and another for the rest of debt. Much like devaluing the euro is bad for france but good for germany, there are issues with both systems that are now blatantly apparent.

        • Well no, you need to change your institutes to modern, empirical evidence.

          With fiat currencies, credit drives money, not the other way around.

          However we have a mone(tar)y institute (The RBA) in charge, with the credit body (APRA) just an operational regulator.

          APRA has to be in charge, and empowered with the same degree of independance the RBA has. It can call bubbles and act on them.

          Thus if CPI is a loose cannon, it can trigger a cash rate response. If it detects an asset bubble, it maintains the current cash rate, but applies levies to lending.

          If the bubble is in property, it applies a levy specifically on investment loans.

          This would disaggregate the cost of credit, as opposed to the blunt tool the RBA has.

          A cash rate of around 3%, a small levy on general loans, of around 100bp, and a further 300bp on residential property, with much of the 300bp being put back into deposits.

          Incentivise savings, minimal costs to business borrowings, and shutout property speculation.

          I don’t subscribe to ‘crowding out’ with government spending, but f*ck me.. all they have is around $80 billion in roll overs for the rest of the stimulus, compared to RE of around $1 trillion.

          A 2:25 ratio, property is crowding everyone else out, not government.

  12. The recent expansion of consumer spending in the US is essentially not durable. Consumption spending is running at a faster pace than income growth and (the very modest) household savings are falling. In the past, consumption has been able to expand because credit has expanded. But clearly, post-bubble, this is not occurring in this cycle.

    So this suggests domestic demand in the US economy has actually been growing at a faster rate at the moment than is consistent with its internal dynamic potential.

    This is reflected in flat-to-falling input prices and in static inventories, both of which indicate that demand is broadly not vibrant.

    The traditional catalysts for post-recession expansions in production, employment and incomes have been housing and auto sales (in the consumer economy), public sector expansion, and business investment. In this cycle, housing is still contracting, auto sales are expanding, but not strongly, the public sector is contracting, business investment is growing slowly. The export sector has been performing well.

    But looking at this econo-scape, it is not easy to see where domestic demand expansion is going to come from. This is reflected in the labour market data, which depict an economy achieving gradual, nominal expansion, while real underlying per capita employment, incomes and demand are ebbing.

  13. Have the unemployed suddenly found a wad of cash?

    I can’t see where this is coming from. Even though as GB said it shouhld be reflected in better unemployment figures, the levels in January were a pre-PFC highs with massive unemployment.

    It must be that those who have jobs are sick of frugality and decided to spend again and more rapidly than in 2007 because employment cannot be the driver. I can’t see this being sustainable, wittling down savings to get a new TV?