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STRATEGIC INVESTMENT INSIGHTS - Weekend Coverage

 

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  SII

 

Death of the American middle class and its insatiable consumption levels.

Is a 70% Consumption Economy the Peak?

Households are borrowing in attempt to maintain consumption

Insufficent as 6K store closing announced @LanceRoberts

I want to hone in on the category of consumer spending that is first to go away so that we may capture the first signals of a consumer spending pull back.  A good proxy for this is the Johnson Redbook Chain Store yoy sales.  This captures the consumer spending taking place at large department stores (Macy’s, Kohls, Walmart, Kmart, etc).  This is going to be where the real discretionary retail spending takes place, as in do I have enough space on my credit card for that sassy blue dress and groceries or just groceries?  And don’t think that is just a theatrical example.  I remember the days of asking myself those very same questions (ok maybe not the blue dress but you get the idea).  That is just real life here in the US (and Canada for that matter).

So this category does well to target the true discretionary spending.  Now if the chart trend appears strong or even flat then we can be confident consumers have not yet pulled back on even the most discretionary of items and so any variations in the overall spending patterns are likely not worrisome.  However, if we see a sharp pull back here it is indicative that a downturn in the overall spending trend is likely substantive rather than nuance.  Let’s have a look.

What we find is that over the past 6 months we had a tremendous drop in true discretionary consumer spending.  Within the overall downtrend we do see a bit of a rally in February but quite ominously that rally failed and the bottom absolutely fell out.   Again the importance is it confirms the fundamental theory that consumer spending is showing the initial signs of a severe pull back.  A worrying signal to be certain as we would expect this pull back to begin impacting other areas of consumer spending.  The reason is that American consumers typically do not voluntarily pull back like that on spending but do so because they have run out of credit.  And if credit is running thin it will surely be felt in all spending.

But one chart doesn’t a story tell, and so we must continue in our quest to determine whether or not we are on the precipice of another crisis.  Another early indicator I like to look at is wholesale trade.  If any sector has its finger on the pulse of the consumer it’s the wholesale/distribution sector.  These guys are constantly talking to retailers to gauge where the consumer is at any given time.  So let’s have a look to see if wholesale trade is giving out any clues.

Currently we find ourselves on the bottom of the latest peak to trough draw down which has given up more than $100B in wholesale trade.  Interestingly we should note that the last time we saw a $100B peak to trough draw down was between June 2008 and January 2009.  However, while it took 7 months to give up $100B in wholesale trade during the Credit Crisis, we’ve just done it in only 4 months.  What this means is that the wholesale trade sector has recognized what the chain store yoy sales chart above depicts, namely that the US consumer has begun to max out.  This is further supported by the inventory levels as per the latest GDP print, which made up 1.24% of the .2% print (wait doesn’t that mean then…. yes you get it).

05-16-15

SII

US CONSUMPTION

 

RETAIL - CRE

The Big Lie: Serial Retail Sales Downward Revisions Hide Ugly Truth 05-15-15 ZH

Over the last 5 years, over 20% of the initial gains in Retail Sales have been 'removed' by serial downward revisions in later months.

For over 65% of the time, a 'good' number prints, stocks rally, the everything-is-awesome meme is confirmed, and then a month later (or more) retail sales data is downwardly revised.

35 downward revisions and 19 upward (and 8 of last 9 downward) for an aggregate spread between initial data and revised of over 5 percentage points (of a 25% gain).

It is all too easy to point the finger at China's 'manufactured' data, but perhaps some reflection on the home truths in America is worthwhile.

Charts: Bloomberg

 

 

SII

 

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  SII

 

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