Consumer Gloom and Doom: real or imagined?

The U.S. Commerce Department released surprisingly positive consumer spending, personal income and personal savings figures today. Personal income went up a seasonally adjusted 1.9% during May compared to April (analysts had expected only a 0.4% gain). Personal spending zoomed up 0.8% in May versus April. Adjusted for inflation, spending was 0.4% - highest since December 2006. Therefore, the increase in spending can't be due to inflation alone. People are confident enough to spent more money on real terms than they did a month or two ago.

But did consumers spend money they didn't have? Clearly not:

• disposable personal income (i.e., after taxes) increased by 5.7% in May after rising 4% in April
  

• personal savings as a percentage of disposable income zoomed up to 5% - the largest figure since March 1995 (also 5%).

How can we reconcile Wednesday's historically low consumer confidence figures with today's release of consumer financial information? The former constitutes what consumers are saying and thinking while the latter shows us what they did.

The Fed: All talk - no action

The Fed left rates unchanged yesterday despite having recently talking about defending the U.S. Dollar and the threat of increased inflation. After a full day's reflection, the markets' response is clear:

• all major stock indexes off more than 2 1/4% (Dow -296, S&P 500 -32, and NASDAQ composite -66)
• the U.S. Dollar off 73.60 to 72.79 since the Fed announcement
• crude oil up from 134 to 140 also since the Fed announcement despite a U.S. government report that crude inventories increased in the past week. Analysts had expected a reduction of 900,000 barrels in inventory but there was an increase of 800,000 barrels.
  

By law, the Fed must support short-term growth in addition to price stability. Europe's central bank focuses exclusively on price stability. It's president said last Wednesday that their goal is to keep inflation expectations under control. They are expected to raise rates next week.

If the European Central Bank raises rates as expected it is likely that the U.S. Dollar will fall further than it already has. A lower U.S. Dollar will give us even higher gasoline and crude oil prices. Unfortunately, the Fed doesn't count these prices - just the "core" prices derived by subtracting "volatile" food and gasoline. But what could be more central to the average person's life than going to work (requiring gasoline), heating their home (oil or natural gas) and food to eat.

This is having an adverse affect on the average consumer. The Conference Board said that their index of consumer confidence fell from 58.1 last month to 50.4 in June for the lowest level since 1992. The index, started at 100 in 1985, was highest recently in July 2007 at 111.9. But consumer's expectations of the economy six months in the future dropped to its lowest levels since the Conference Board began its work in 1967.

Let's hope the Fed sees the need to increase rates and defend the U.S. Dollar soon.

Tame "core" inflation?

The U.S. Labor Department reported the consumer price index (CPI) gained 0.6% in May. Excluding food and gasoline the CPI went up only 0.2% as economists had forecast. The yearly increase of CPI went up to 2.1% just above the Fed's "comfort zone" of roughly 1.5% to 2%.

Do you know anyone who lives predominantly on "core" (i.e., no food and no gasoline)? I didn't think so. We will have to wait and see what the Fed's reaction to this is.

Significant Improvement in Retail Sales

The Commerce Department said today that retail sales increased in May by 1% (economists had only expected a 0.5% rise). They also revised upwards April to 0.4% (from a 0.2% loss) and March to 0.5% (from a 0.2% gain). This suggests economic strength because consumer spending represents 70% of GDP.

But the Wall Street Journal claimed that the sales results were due to the recently sent out stimulus checks. The New York Times reported similar sentiments: “The sharp improvement in May was clearly driven by receipt of the first wave of tax rebate payments,” Joshua Shapiro, chief United States economist at the research firm MFR, wrote in a note. “These payments will continue to be a positive factor for the consumer in the next couple of months.”

How do they know the source of consumers' funds? The positive impact that improved consumer retail sales has on the overall economy seems to me to be the real story. GDP for the first quarter was 0.9%. This news suggests that the current quarter's GDP growth will be higher.

Crude oil invenentory up but gasoline inventory down

Yesterday, the U.S. Energy Information Administration reported that crude inventories sank by 4.6 million barrels for the week ending June 6th. Analysts had projected only a 900,000 drop. But gasoline inventories increased by 1 million barrels, just under analysts' expectations of a 1.1 million gain. Add to the mix that refineries used less oil for the week and oil imports are down to 9.7 million barrels a day from 10.1 million barrels a year ago. The high price of gasoline is reducing demand - people are driving less.

The price of crude has been in a bullish trend since it was $7 a barrel in 1998 and only $84 in February. Crude made an historic high (so far) of $139.12 on June 6th. This bullish trend is going to end and a bearish trend will begin. Commodities have no bullish bias as do stocks.

Consider what happened to crude before late 1998 when it was $7. Only 2 years earlier, in January 1997, crude made a high of $27.64. Going back to the winter of 1994 crude was all the way down to $2.65. Of course, these price points don't take inflation and the value of the U.S. Dollar into account. But nevertheless, the history of commodities shows a balance between prominent bearish and bullish trends.

Just as it was unthinkable that gasoline would be $139 in 1998 when it was $7 - it was just as unthinkable that gasoline would be $7 when it was $27 in 1997.

Bernanke's finally worried about inflation!

Fed Chairman Bernanke said today that he was unconcerned by May's 0.5% raise in unemployment but worried that the big rise in crude oil prices "has added to the upside risks to inflation". Why did it take him so long to become concerned about the rise in commodity prices in general and crude oil in particular?

Before trying to answer that question, let's remember what has happened to oil recently. In mid January 2007, crude oil bottomed at $51.62. Last Friday it closed at $139.12 for a 170% gain in just 18 months! Since crude oil is necessary for so many parts of our economy (e.g., heating, transportation, plastics) the rise in its price acts like a giant brake on the economy - similar in effect to a large tax increase.

Some don't know that since the 70's the Fed has had to create short-term economic growth along with price stability. These two tasks are frequently in conflict with one another.

I think the reason Bernanke waited until now to speak about high-priced crude oil and inflation was because of the recent sub-prime economic weakness. But Bernanke's lowering of interest rates (making the dollar drop to historic lows) to help the financial sector is what powered crude oil so fast. Now the high price of crude is crippling growth. Let's see if Bernanke does something more about inflation than just talking about it.

Slight improvement in real estate

Today the National Association of Realtors said their pending sales of previously owned homes index increased 6.3% in April compared to March. Analysts had projected no change in the index. Home sales seem to have picked up in areas where prices have dropped the most.

This story is almost identical to an article a week or two ago which described increased home sales in areas hardest hit by foreclosures.

It's going to take a while, but as home prices continue to sink, demand will rise in most areas. Prices will start to increase when inventories shrink to historically normal levels.

Confusion in 4 sources of employment data

There are four sources of employment data: ADP provides a snapshot of how many jobs it thinks have been added or lost in the U.S. economy based on their managing roughly 1/6 of all non-government payroll jobs. Last Thursday ADP reported an increase of 40,000 jobs in May. So far, good strength in the labor market.

The U.S. Labor Department reports once a month on jobs based on their "household survey" and their "payroll survey". The "household survey" reports gained or lost jobs by calling families (some 70,000). This picks up people who have jobs but are not in the payroll system (they pay estimated taxes - or they're tax cheats) and is responsible for the unemployment rate which increased for May from 5% to 5.5% Score one for a weak job market. But why didn't these people who lost their jobs apply for unemployment insurance (more about that below)?

The Labor Department "payroll survey" reported a loss of 60,000 jobs during May. The Labor Department calls the biggest 300,000 companies for their survey. How could their survey and the ADP survey both be correct at the same time? But, again, why didn't these people who lost their jobs apply for unemployment.

How do I know that most of them didn't apply for unemployment insurance? Because the Labor Department also produces a weekly report of new unemployment claims. According to these reports, new unemployment claims have fallen for 3 out of the last 4 weeks. In the most recent report new claims were 357,000 from a revised 375,000 the previous week. If lots of folks were losing their jobs I think most of them (except for those who aren't in the payroll system) would end up collecting unemployment checks.

Adding all of this up: the evidence points to a moderately strong labor market. I think we have to discount the "household survey" because it is known to be volatile at this time of year due to an influx of college kids into the job market. As to the "payroll survey" - the only way this loss of jobs makes sense in accordance with no increase in unemployment claims (and ADP's report of an increase in jobs) is if the people who lost jobs were able to get new ones in companies that were not part of the government's survey. ADP must have a much wider cross section of the U.S. economy.

Doesn't look like a recession: strong retail sales

Today, Wal-Mart Stores reported a 3.9% increase and Sam's Club a 3.6% increase in same-store sales. This surprised even Wal-Mart as they had forecast only a 2% gain. High gas prices seem to have pushed people into more bargain stores as their results have been better than department stores.

Despite big media's best efforts to portray the country as either being in - or just about in - a recession, more and more evidence has come out suggesting moderate economic strength.