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Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Why Government Reports Aren’t the Only Indicators of Economic Health

Economics / Economic Statistics Sep 22, 2010 - 12:16 PM GMT

By: Jared_Levy


Best Financial Markets Analysis ArticleWhen I am not traveling to New York City, Philly or Chicago, I work mostly from my home office. I tend to look out the window while I write and trade. I get a nice view of the Dallas skyline and trees, but I also have a fairly clear view of the neighborhood dry cleaner, whom I have been going to for many years. Over the past year, I have noticed the parking lot fairly empty and the drive-through window not as busy as it used to be.

Observing this for months, I thought I would visit Joseph, the owner of the dry cleaner (and friend), and ask how he was doing. Usually I just drive through and pick up and drop off my dry cleaning with one of his friendly staff and give Joe a wave, but this time, I wanted to know how Joe (and his business) was doing.

Joseph, who is young and extremely involved in his small -- but usually busy and integral part of my diverse neighborhood -- business, is a very personable and smart man who has his finger on the pulse of the local economy here in Dallas.

He has to, because in the dry-cleaning/alterations business, the profit margins are relatively low, which means that changes in flow of customers and/or articles of clothing can have a profound impact on business and this can happen in a relatively short period of time.

This dry cleaner serves a community of multimillionaires from Highland Park to college students from SMU and everything in between. The neighborhood has a large, dense base of young white-collar professionals, which is Joe's bread and butter.

Joe mentioned that he has been in a lull for a while and mentioned that every day still, long-time customers of his are losing their jobs. He said this with a surprised and concerned look in his eyes. Always positive, Joe did mention that things seemed to be picking up, possibly as people go back to school and back to work after summer vacations.

He did agree when I asked if the average customer was increasing their wash/wear cycles, trying to get the most of that $1.99+ it costs to clean a garment. So maybe Americans do not smell as good in the recession as they did at the beginning of 2007 -- that could be another economic indicator.

Listen to the Stories of Small-Business Owners

Even though this anecdotal evidence may seem to have minimal merit when analyzing the health of the U.S. economy, it may actually have more credence than you think. Many of these Americans are on the front lines and have the highest sensitivity to changes in consumer health.

The web now allows us to watch and read news and data from all over the U.S. (and globe for that matter). While I always say that looking out your front door and talking to people can usually be the best way to gauge sentiment, you can also look at the headlines, blogs and editorials that are published in major cities around the country to see what it happening out there and make sure that it jives with data that is being released.

(Investing doesn't have to be complicated. Sign up for Smart Investing Daily and let my fellow editor Sara Nunnally and I simplify the stock market for you with our easy-to-understand investment articles.)

Checking Up on the American Consumer

How can you get a gauge on the health of the American consumer? We all hear about the unemployment rate, which can be misleading not only because of the different types (groups) of unemployment, but also due to changes in something called the "labor force," which basically is the number of Americans ready, willing and able to work.

The unemployment rate helps give a very macro view, but here are two other points (among others) you will want to check up on:

Consumer Credit

Each and every month (around the 5th) the Federal Reserve releases a report on the total amount of consumer credit outstanding in America. Think about it as the total outstanding credit card and loan debt, which can be used to pay for everything from motorcycles and education to washing machines and cruises. If this number is declining, fewer Americans are borrowing and perhaps spending as well.

If this number is on the decline, chances are that credit is tight, either because of banks not willing to lend or consumers not having the credit or both. It could also mean that Americans are saving their money and paying off debt because they are scared of not having a job next week.

I have a feeling that right now, it's a bit of all three. In July alone, revolving consumer credit decreased at an annual rate of 6.25%.

Consumer Spending

Consumer spending (incl. healthcare) accounts for about 70% of our GDP, so this data set is extremely important used in conjunction with consumer credit to gauge our fellow Americans' fiscal health. This report is also combined with consumer income, so we can see how much the average American is earning. The last report showed that consumer spending rose 0.4% in July from the previous month, after staying flat in June. If you adjust for inflation, spending grew only 0.2%.

Joseph Was Right After All

That weak consumer spending number is not good because American businesses need the consumer to spend for them to survive, and what is even scarier is that in that same time frame spending actually outpaced the savings rate, which tells me that Americans are NOT earning enough and obviously many are still out of work.

President Obama addressed this in his town hall meeting on CNBC Monday, noting "the average middle-class American's income dropped 5.1% from 2001-2009." Unfortunately, for those Americans out of work or struggling, he offered no real immediate solution to this issue.

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Source :

By Jared Levy

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange's youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video "Trader Cast." Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

Copyright © 2010, Taipan Publishing Group

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