The US Consumer is Recovering
03/15/10
The American consumer refuses to die. Despite a dip in confidence in February, despite high debt levels and despite high unemployment numbers retail sales rose by 0.3% from January's level (consensus was minus 0.3%) and by 3.9% from the year before. You may be surprised at this "reckless behavior and wanton frivolity" but you shouldn't be. Consumers are acting with relative rationality. Just like businesses learned after the 2000 dot.com bubble burst that it is insane to finance the orders of your customers while treating the resulting sales as cash income, so too has the US consumer learned that living by your credit card means dying by your credit card. For ten years now, businesses have shown discipline in spending and investing and I expect nothing less from the US consumer. What arguments do I have for believing that my fellow consumers will behave just as rational? The main reason is that consumer credit has been falling continuously since July 2008. The two sole upticks in January 2009 and January 2010 were Christmas related and reversed the following month. It took 18 months to reduce the total stock of consumer credit from $2,580 billion to $2,456 billion, which amounts to a 5% reduction in 18 months. Why is consumer credit falling while consumer spending is rising? Consumers with jobs use their monthly income to reduce debt while slowly increasing spending also. The situation is tentative and fraught with uncertainties as long as the job market is not recovering, but here too, there are good things on the horizon.
The continuing surprises in retail sales are perhaps best explained by the second chart above, which shows you the Bureau of Labor Statistics Household and Payroll Surveys. Recessions are shaded grey, the estimated monthly increase in the US labor force is marked by the red line around the 100,000 level. The green line represents the survey of payroll employment (establishment survey), conducted by questionnaire which is sent to 160,000 US employers covering 400,000 work sites. This number is often quoted in the media. The black bars represent the so called "household survey", which is conducted face-to-face with 60,000 Americans in their homes. This number jumps around a lot and is therefore represented as the average bar of two months. If one averages out monthly fluctuations then the household survey turns out to be more sensitive to changes in employment conditions. It picks up subtle changes in small business employment which are not necessarily measured by the "big corporate" establishment survey. GaveKal says that "... big movements in the two-month average of the household survey have always preceded major turnarounds in the payroll figures at cyclical turning points." Now look at the chart. The past two months saw the creation of 849,000 jobs, that is 4242,500 jobs per month! That is a remarkable turnaround and is showing us that the American consumer is indeed acting rationally. Jobs are being created again and April 2, when March employment numbers are being announced, should give us a nice upside surprise. Different economists, of course, have come to different conclusions regarding the latest employment report. Where I see positives, others see negatives. The continued reduction in the labor pool (labor participation rate) is often quoted as symptomatic of the difficulties in obtaining employment to the point where job seekers become discouraged and just stop looking and drop out. That is clearly a negative but this too will improve over time, I am convinced. Anyone who still doubts that the US recession is over and that the economic recovery will be strong is late to the party. I think that the "business led recovery" that we spoke about before is entering a positive feedback loop. The idea of a production-led recovery (as opposed to a consumption led recovery) assumes that consumption comes late in the cycle. The first part of the cycle is about corporate profitability. As mentioned before, US corporations have been expanding profitability while reducing leverage for over ten years now. They are cash rich and are slowly starting to invest again. Eventually (just about now) new jobs are added, leading to rising consumer confidence and lastly increased consumption. The interesting part is that the manufacturing part of the economy is leading us out of this recession. The overall economy for example still lost jobs in February, whereas the manufacturing sector added 20,000 jobs in January and another 1,000 jobs in February. The US manufacturing sector is expanding again, and this time, not only for the domestic market.
President Obama announced details of his National Export Initiative on Thursday during a speech to the U.S. Export-Import Bank in Washington, D.C. Mr. Obama's stated goal is to double U.S. exports by 2015 and create two million jobs in the process. In the past, most U.S. companies focused almost solely on the robust domestic market for their goods. American companies that did seek out foreign markets were at a disadvantage when competing with foreign businesses, because many Asian and European governments promoted their own domestic companies. But since American companies still had their own domestic markets they did not complain and focused on the low hanging fruits in foreign markets. Everyone was happy with the "Pax Americana". One of the leading reasons the world has been so stable is because the traditional merchant powers have had a deep market to sell into: the United States. Stratfor wrote a most excellent article about this recently: "Part of the peace accords and reconstruction of Japan included granting it full access to the U.S. market as well as full American protection of Japanese trade lines. Part of the peace accords and reconstruction of Germany included a similar arrangement. These arrangements gave a powerful incentive to be part of the U.S. alliance structure that the pattern was repeated throughout Western Europe, in Taiwan and Korea. ... By granting these states privileged access to the American market - and not necessarily demanding American access to their markets in return - the United States created conditions extremely favorable for its allies' economic development and prosperity. The United States traded some market share to turn adversaries into allies, both reducing the number of foes and intimidating the remainder by the sheer size of the U.S. alliance structure. As a result, some of the world's most aggressive mercantile powers became placid. They no longer had to go to war for access to resources or markets." Obama's new strategy to actively promote US exports represents a drastic change and may create domestic success but international friction. The free trade advocates all over the world can show us now how serious they really are. If the US actively promotes exports, the trade balance is poised to improve further.
Conclusion: The U.S. still has the largest and most dynamic consumer market for a broad range of goods. Stabilizing house prices, a recovery in the stock market and deleveraging are gradually rebuilding household net worth. Real income is rising and - jobs are finally being created, while the trade deficit continues to improve. Those are arguments for a continuing bull market in stocks and in the dollar.
Hermann Vohs
"If goods don't cross borders, armies will."
Frederic Bastiat
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
