Yesterday consumer spending started back down the path of contraction. Remember one of the major sparks for the March rally was the improved retail sales numbers. It is funny how a once very pessimistic market can turn overly optimistic in such a short period of time.
Wall Street and the US government rely heavily this economic data for their analysis of the economy and its current state. Interesting how this data did not reveal the current state of the economy sooner. A year ago very few could have predicted the current crisis and its depth. It would seem that this method of data collection is too slow in reporting present conditions (especially with the recent dramatic revisions of past reports).
The US Federal Reserve went to a tightening status to combat inflation in April 2008 based off of this type of data (which was extremely late to the relatively obvious state of increased inflation). With an already low overnight bank rate, the Federal Reserve was forced to use up its most effective tool to stimulate the economy by taking it to 0% to .25% target. The Federal Reserve has also started to rapidly expand its balance sheet using “innovative” methods to promote lending. When considering debt and leverage, there really are limits to “innovation”; debt still needs to be repaid.
What happens if the home sales numbers start to show weakness again? What happens if (when) commercial real estate write offs start to replace the consumer debt write-offs on banks balance sheets. Do we have any other weapons to throw at the problem?
Unemployment is on the rise and Americans are more interested in saving money than spending right now. The US Government is trying to cure the problem by expanding lending while the US Citizen feels the solution to their problem is to reduce their debt. Interesting how the government and its people can be on such different pages.
Consumer spending makes up 70% of the United States GDP (I would argue that without the consumer we would not have the other 30%). The US Government and Wall Street have declared the worst is over. The average consumer does not feel the worst is over as seen in the retrenchment of retail sales, continued high savings rate and decreased consumer debt. What economic indicator should we believe?
Tags: consumer spending, retail sales, Stock Market, stock market history, wall street
