blip or trend?
 

from Forbes:

Consumer Spending Drop Largest in 3 Years
08.03.2004, 02:37 PM

Consumers, the lifeblood of the economy, clutched tight to their wallets in June and caused the largest spending drop in three years.

The Commerce Department reported Tuesday that consumers cut their spending by 0.7 percent in June from the previous month as high energy prices and a sluggish job market made for more cautious buyers.

Because the buying retreat came off a strong 1 percent rise in consumer spending in May, some economists believed it was just a temporary lull. Others weren't so sure, however, and they said the disappointing showing in June raised new questions about consumers' future willingness to spend.

Americans' incomes, the fuel for future spending, rose by 0.2 percent in June, down from a solid 0.6 percent increase the month before.

The figures are not adjusted for price changes.

"Jobs will be the key factor to get income and spending back on track," said Lynn Reaser, chief economist at Banc of America Capital Management.

The nation's payrolls grew by just 112,000 in June, half the amount analysts had forecast. Economists are predicting a rebound in July, however, with job growth in the 200,000 range. The government releases the employment report for July on Friday.

Consumer spending accounts for roughly two-thirds of economic activity in the United States. Thus, it plays a crucial role in shaping an economic recovery.

Federal Reserve Chairman Alan Greenspan, appearing before Congress last month, acknowledged that the economy had hit a rough patch in June. He said higher energy prices had sapped consumer spending but predicted that the softness in spending would be short-lived.

Greenspan expressed confidence that economic growth, which slowed to a 3 percent annual rate in the second quarter of this year, would pick up momentum in coming months. He noted that anecdotal data for July seemed promising.

In June, though, the latest snapshot of consumer spending was weaker than economists expected. They forecast for June a tiny 0.1 percent dip in spending, rather than 0.7 percent, and a 0.3 percent rise in incomes instead of the actual 0.2 percent.

"These are sour numbers. There is no sugarcoating that," lamented economist Ken Mayland, president of ClearView Economics. "Consumers were confronted with a whole range of high prices, including energy, and they balked."

The 0.7 percent decline in spending was the first since September 2003 and the largest drop since September 2001.

The decline was led by a cutback in spending on automobiles and other big-ticket durable goods. Spending on durable goods declined by 5.9 percent in June, compared with a 3.7 percent rise in May. For nondurables such as food and clothes, spending dipped by 0.3 percent, following a 1.4 percent increase. Spending on services rose by 0.2 percent, down from a 0.3 percent increase.

"May be some households are putting some money in the cookie jar seeing as over 80 percent of the general public see higher interest rates and hence higher monthly debt-servicing bills ahead," said Merrill Lynch's chief economist David Rosenberg. "Perhaps concerns are intensifying over what seems to be a semipermanent high energy price environment."

Some economists suggested merchants may need to discount to entice shoppers, and more generous incentives for big-ticket items may be needed to boost sales in the coming months.

Wages, meanwhile, were flat in June after a 0.6 percent rise in May. That reflected the slowdown in job creation in June as business showed more caution.

Tuesday's report is consistent with a string of other economic data in June - including the employment report, retail sales and industrial production - that suggested the economy took a bit of a breather during that month.

Even so, economists still expect the Federal Reserve to boost short-term interest rates again when it meets next on Aug. 10. The Fed increased interest rates June 30 for the first time in four years. It raised a key rate to 1.25 percent, from a 46-year low of 1 percent.

Economists believe the Fed will raise rates next week by another one-quarter percentage point in a bid to keep inflation from becoming a problem.

Everyone's just saving up for the '05 SUVs.

This released today:

"Factory Orders Grew Stronger in June
By JEANNINE AVERSA, Associated Press Writer

WASHINGTON - America's factories saw orders grow stronger in June, a spot of good news for manufacturers and for the economic recovery.

The Commerce Department (news - web sites) reported Wednesday that orders placed with U.S. factories rose by a solid 0.7 percent in June from the previous month. The performance exceeded economists' expectations for a 0.5 percent advance.

The increase, the largest since March, was up from a 0.4 percent rise in May.

"Manufacturing looks quite healthy for the reason that its big demand drivers — business investment and exports — at the moment are operating at a higher gear," said Clifford Waldman, economist at Manufacturers Alliance/MAPI, a research group...."

Entire story:

http://story.news.yahoo.com/news?tmpl=story&cid=668&ncid=749&e=6&u=/ap/20040804/ap_on_bi_go_ec_fi/economy

I think there's a lot of unstable elements in the ecomony right now, although groups of a certain persuasion are loathe to discuss them.

so manufuacturing orders went up, but purchases for durable goods went down. Either they are betting on exports, or someone's gonna get fired...

In a show of true fairness, one of the veeps at my co. was actually *****canned when his division screwed up severely. He went on to become CEO of one of our main suppliers. :rolleyes:

alas no, I'm in academia. Where you're never quite sure what will get you fired or promoted (no tenure for staff positions).

Spending is down? Heck, I'm going against that trend. The lady at the front office for my apartment complex (who receives all of my packages) is now convinced I'm building a Pelican, thanks to all of the boxes neatly labeled as containing "Pelican Parts."

Dan

It's hard to say if only looking at 1 month's worth of data.

There are several factors working against a resurgence: high price of energy, increase in interest rates, a steep RE cliff on the horizon, and the fact we're in an election year.

One thing is for sure: the consumer is fickle. If one lemming jumps, a whole bunch join him.

My guess: this is just a blip. You can bet Bush is having heartburn over this one.

I reckon the "I'm feeling rich because my house keeps going up in value" is coming to an end. So people will spend less. It's gonna happen here in NZ too.

I consider myself part of the tough crowd, but that one of the funniest things ever said on this site!

Consumer spending and corporate capital investment are going in different directions.

On the consumer side, spending has been strong for a long time, through the stock market crash, economic recession, terrorist attacks, etc. Consumer spending kept the recession from being worse than it was. Home value increases, easy credit, tax rebates and tax cuts all propped up consumer spending. Now consumer spending is showing signs of rolling over, as many economists have been expecting. In June, gas prices took disposable income away from consumer goods. Decreasing home affordability is pressuring home-related durable goods. Layoffs were quite high, new job creation was low, and surveys of company intent to hire were weak.

On the capital investment side, spending was terribly weak during the recession and is now improving. Companies have made deep cuts in operating expenses (e.g. layoffs and lower wages), so their cash flow is strong. Credit has been easy and interest rates low. A tax break, which allows accelerated depreciation of capital equipment placed in service by the end of 2004, is also boosting capex. Therefore measures of current orders, like the Commerce Dept durable goods data and the ISM factory orders index, are quite strong.

Something to worry about, though, is that leading indicators are declining, suggesting that future capex may be weaker than current. Another thing to worry about is whether corporate revenues can keep improving if consumer spending (and employment) does not improve.

Now July retail sales were rather weak too. About half of the retailers missed same store sales expectations. It could still be a blip but now it is a two-month blip.

Bush needs to get his arse on the phone with the Saudis. We need an oil infusion pronto. If inflation goes up, the housing bubble won't just deflate. It'll explode, taking out the entire economy.

Not if oil continues to stay high, disrupting the economy. Yesterday wasn't pretty.

And here we go with employment - extremely weak July payroll data (added just 32K jobs vs expected 240K, and last month revised down).

Big ticket items were soft in june and I doubt if there will be much of a pickup in july.

Still, consumer confidence is very high at the moment, so it's definitely a mixed bag of indicators.

The key leading indicator, the Dow, is not predicting good things for the next 6 months...