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Consumer Spending – Another Drag on the U.S. Economy!

Economics / US Economy Aug 05, 2010 - 11:07 AM GMT

By: Sy_Harding

Economics Best Financial Markets Analysis ArticleMost of the time in American history it’s been a good thing that Americans love to spend, a good thing that consumer spending accounts for 70% of the U.S. economy.


Remember the recession of 2001? After the September 11 terrorist attacks drove consumers inside in fear, the consensus was that the recession could not help but worsen into the next Great Depression. But the Bush Administration issued emotional appeals for consumers not to huddle in fear but to come out and spend the economy out of recession - even if they had to borrow the money to spend, to “show the terrorists they cannot destroy the U.S. economy”.

It worked better than anyone could have expected. Households were provided with tax rebates and bonuses to spend. Interest rates were dropped and easy money loans were made available. Consumer spending not only pulled the economy out of recession but continued to do the heavy lifting, as businesses remained reluctant to spend until well into the recovery.

Unfortunately, the call for consumers to spend more, and the release from guilt provided by the suggestion that borrowing to spend was a good thing, unleashed reckless spending that not only salvaged the economy but eventually produced record credit-card debt, the housing bubble, refinancing of mortgages to take out equity for still more spending, and a euphoria about the good times that was the forerunner of the subsequent financial meltdown.

Currently it’s not such a good thing that consumer spending accounts for 70% of the economy. This time around fearful consumers are already head over heels in debt, wiser regarding the temporary illusion of good times financed by borrowing, and determined to pay down debt and save rather than spend.

That is producing darker clouds over the already faltering economic recovery.

While reports that McDonalds or Starbucks are doing well lifts hopes, it’s the warnings and disappointments this week from the likes of Proctor & Gamble and Unilever, producers of consumer goods across a broad section of products that tell the real story.

It also showed up in the 2nd quarter earnings reports. While earnings mostly beat Wall Street’s estimates, much of the gains again came from lay-offs and other cost-cutting. There’s only so much cost-cutting that businesses can undertake.

Standard & Poor’s reports that while most S&P 500 companies beat earnings estimates, sales at one in five companies missed their revenue estimates. Bruce McCain, chief investment strategist at Key Private Bank says that consumers are spending 60% of what they normally spend during an economic recovery.

Also not good news for the U.S. economy, many of the companies reporting the biggest earnings gains generated most of those earnings overseas and from exports, not from sales in the U.S.

Against that backdrop, retail chains are reporting their same store sales for July today, and so far they are less than stellar, particularly considering the comparisons are to July of last year when chain store sales fell an average of 5%. So far, of 28 retailers tracked by Thomson Reuters17 reported lower than expected sales, while only nine beat the estimates.

Among the winners Costco Wholesale (COST) reported its July sales were up 6% over July of last year. Limited Brands (LTD) reported a big increase of 12%. Macy’s (M) beat estimates with a 7.3% increase.

But there are an unusual number of important disappointments. For instance, Aeropostale (ARO), a popular store with young people, reported its July sales were only up 1% over July of last year, missing estimates of a 7.1% increase. American Eagle (AEO) sales were flat. At the other end of the scale Dillard’s (DDS), the upscale retailer, saw its July sales decline 3%. JC Penney (JCP) reported July sales fell 0.6% missing forecasts of a 3.4% increase. Discounter Target (TGT) sales were up only 2%, missing estimates. BJ’s Wholesale (BJ) saw its sales rise 2.8%, missing estimates of a 4.5% increase.

The economy really needs consumers to spend, but consumer confidence was at its lowest level in nine months in July, and it looks like consumers are not only reluctant to buy homes and autos, but are now becoming reluctant to spend in the malls.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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