The Big Spending Fade Rolls On

This morning's retail sales report will surprise no one who's been watching the economy this year, but the trend is still disturbing.

Estimated monthly sales for retail and food services on a seasonally adjusted basis slumped 1.2% last month, the biggest monthly percentage decline in more than three years, the U.S. Census Bureau reports. On a 12-month basis, retail sales are 1% below the year-ago figures. As our chart below reminds, the trend looks ugly, and it's virtually certain that there's more of the same and worse on tap for the coming months.

The report gets uglier the closer you look. Save for spending at gasoline and health/personal care retailers, every major category of retailing fell last month vs. August. There's still year-over-year growth in a few categories, although the red ink is likely to spread on that part of the ledger.

If you can stand it, reviewing the unadjusted numbers for retail sales shows the state of consumer spending looking far worse. Indeed, unadjusted retail sales overall dropped 8.5% in September alone from the month before. One can only wonder what October's numbers will bring. As they say, where there's one cockroach, there's usually another.

Considering the U.S. economy's high dependence on consumer spending (roughly 70% of GDP comes from personal consumption expenditures), today's retail numbers speak loud and clear that the recession is here, and it probably has been for some weeks or months, and that the general economic downturn will deepen for the remainder of the year and quite possibly continue through early next year. I was at a press conference with money managers in New York yesterday and one especially pessimistic chap talked of quarterly GDP falling by an annualized 5% at some point in this year's second half. We're not sure the pain will get that bad, but one can't rule out much these days in light of all the negative surprises in recent weeks.

The bright side of all this, if we can call it that, is that inflation for the moment is in hibernation. Again, no surprise there, at least not since last month, and for some the epiphany came a lot earlier. Yours truly, however, was a bit late to the party. But better late than never. We've been worrying about inflation for some time, and we're still convinced that eventually this beast will return as a threat of some distinction, given all the liquidity that's been pumped into the global economy. But the magnitude of the economic and financial ills recently convinced us to reconsider the threat in the short term, and we said as much a month ago.

Today's wholesale price report for September only lends more support to this view. Producer prices last month fell 0.4%, following a 0.9% drop in August, the Labor Department advises. Core PPI is still bubbling, posting a 0.4% rise in September, although we expect that too will moderate if not turn negative in the months to come.

A whiff of disinflation that could turn into a mild if temporary deflation is in the air. So it goes with all the economic and financial unwinding these days.

Unfortunately, the bad news for Main Street economics has only just begun. It's unclear where exactly we're headed and how much damage the economy will suffer. It's still far too early to venture a guess other than to expect a hefty storm. No, it's not the end of the world, but the Great Moderation, like so many other rosy assumptions that took root over the past generation, is set for a major revaluation. Recessions of some magnitude, in sum, only appeared to be a thing of the past.

Comments

[Smarty_Pants]

I vote for a new label:

The Great Reversion to The Mean

How long can you expect prosperity based on debt to last. after all?

[mr.g]

bright side no inflation - the dark side there is no demand to keep prices up which basically means there is no economic activity in the future - there is a reason they call them futures contracts and not here and nows

[PastTense]

I, for one, still expect a double digit increase in my health insurance premium next year.

[wyosteven]

This does not surprise me one iota. All of the bull$hit that has been sputtered from "experts" has been a complete fallacy and will continue to darken immensely.

Face it folks, when main street is sacrificed for corporations, only one thing can happen -- collapse.

Now, let's put a little light on all the illegals that are here... those same illegals have all the jobs that lazy Americans would be forced to reconsider taking -- all 10 million of them that have been given out from under our incompetent noses during the last decade(s).

Hold on, we're in for a crash and burn -- with only more burn and social unrest after that. Expect Main Street to erupt in conflict after conflict.

DISCLAIMER: I'm long on common sense and reality, short on patience with leadership and the rich to do something that actually helps America.

[OilyGasMiner]

Lets face it, we've been in a recession for sometime, however the government has been trying to elude us from the truth/ The fact is the numbers are coming in slowly to justify the reaction of investors and the overall market. It is just evidence to support the nation's hypothesis.
Mr. g the Us inflation figures are extremely skewed to a particular direction by means of its sheer calculation. We WILL see prices rise. Don't igore the supply side of the equation. With an increase in money supply, and decrease in interest rates.. comes an increase in inflation.. and potentially HYPERinflation.

[Wefwef]

The real recession begun in January 2006 when dollar dropped off the cliff. It's remarkable how the equity markets were prepped up for another 22 months after that.

The real bottom is somewhere way below the 2002 bottoms, that time only dotcoms were affected, now the whole economy is hurting, from banks to consumers and everything between.

[moonbat1775]

Yeah, poverty is one way to bring down price inflation but I prefer the natural tendency of free enterprise to bring about lower prices.

Dante assigned bankers (fractional reserve, I presume) to one of the lower regions of hell. But no problem, stem cell research might be able to put off the day of reckoning for quite a while. EXCEPT, not forever!

[mr.g]

oilygas miner I am fully aware of the hyperinflationary pressure to come but it wont be in copper or lumber(due to lack of economic activity and demand) -it will be in food- natural gas and heating oil-gold and possibly silver (being avg joe can afford to buy it and not gold)) because they are necessities and will be a safe haven for speculators /investors to hold money until economy spins which will also help inflate prices even more (life is a b aint it?)

copper below 240 is basically predicting almost all economic activity stops in my book

[Frank Miller]

This is not surprising. We know we will continue to have a number of bad days with a few rebound days. Bottom line: the US markets are too unstable in the near future. Investors really need to make changes to their investing strategy if they have not already, especially since the market has not hit the bottom yet.. This means move money into T-bills and municipal bonds and invest some overseas to guard as a hedge against the coming inflation of the US dollar. I use offshore bank accounts for this and they have helped me. If you would like to learn more, feel free to visit my site.

Best,
Frank Miller

[surgcare]

Deflation ,if this is true the stock market is way over vaued so look for significant downside . This wil probably be true for a while but inflation ,maybe hyperinlation ,is in our future .For those pumpog money into T-Bills better find a better place for their money . Besides losing on future inflation its a bubble in the makng .

[constructe]

Yum... I look forward to $1 McDonald's meals and $0.10 apples again. It just may be hard to find my piggy bank in the garage amidst all the junk. And that's just about the crux of the problem. Too much profligate spending, no savings, and a boatload of federal, trade, and personal debt. Only about 5% of the population has a positive net worth and dropping. If you don't include your illiquid (and falling) house price it drops to about 3%. So who has $... the banks, super rich, and no one else. They just have debt disguised as cash (also known as the credit card). No wonder $ is becoming precious no matter how much artificial $ they make and dump into the financial system.