Beware the U.S. Consumer

The resiliency of consumer spending so far in 2009 is rather fortunate since it accounts for some 70% of US GDP. Furthermore, it has significantly contributed to many recent observations of green shoots in the US.

Importantly, it has most likely been a key factor in the spectacular change in investor sentiment since March, leading to much higher equity prices which themselves appear to be feeding the recent more upbeat consumer surveys.

An analysis of the sources of personal disposable income (PDI) so far in 2009 reveals that significant but unsustainable tax rebates have benefited consumer spending.

Looking forward, most, if not all components of PDI are trending down for the rest of 2009, which would take expenditures below their December 2008 low.

If so, most of the green shoots observed recently will just die, the nascent inventory cycle will peter out without rising final demand, housing will suffer even more, especially since foreclosures will become even more prevalent in coming months, banks will experience a new wave of mortgage and credit losses, the stock market will turn down and consumer confidence will vanish.

Disclosure: long WMT.

Comments

[RiskReturnO...:]

Long XLE, short XLY until uemployment peaks, savings rate peaks, and crude oil reverses.

Jun 11 11:55 AM