After GDP, The Wake-Up Call

Today's income and spending report for September takes the shine off of yesterday's glowing GDP news. A closer look at what unfolded in the third quarter has now arrived in terms of the impact on consumer sentiment and the ongoing pain from the labor market. The upward momentum that was all the rage in August, which provided potent aid in the bullish Q3 GDP trend, took a turn for the worse in last month of the quarter. The fear is that the negative sentiment will roll on into the final months of the year.

The government today reports that real disposable personal income retreated by 0.1% last month and personal consumption expenditures tumbled 0.6%. We noted yesterday that the Q3 GDP report, encouraging though it is, would be succeeded by a war for growth and today's numbers only bolster the forecast.

On the income side, we can sum up the challenge with the news that government payments were the only positive contribution to employee compensation in September. No wonder, then, that spending momentum is fading as the government's stimulus efforts recede. Consumer spending isn't necessarily headed for a persistent decline, but neither can we assume that it's set to regain territory lost over the past year.

Yesterday's GDP news, which revealed that consumer spending was up by a healthy 3.4% in the third quarter, sparked a wave of commentary in favor of the idea that Joe Sixpack had returned to his old habits. But today's income and spending report, which offers a more granular look at the third quarter, suggests otherwise. The gains in August, driven by government stimulus, have given way to the somewhat more sobering reality of September.

"The consumer went out spending in August, but once that incentive [from government stimulus programs] was taken away they didn’t have the same reason to spend as much,” Jonathan Basile, an economist at Credit Suisse, tells Bloomberg News.

It was always naïve to think that consumer spending, which represents some 70% of U.S. GDP, would snap back quickly. There's a price to pay for the crisis of the past year in terms of trips to the mall. It's been tempting to think that the full sacrifice that will be meted out in consumer land is behind us. In fact, quite a bit of the blowback may still be in front of us.

Comments

[Plant the s...:]

The lower spending on Auto was expected once Cash for Clunkers went into the rear view mirror. The question I have is whether other consumer spending had the same trend or was this an Auto hangover.

Oct 30 12:58 PM

[thiazole:]

Yet in spite of that weak consumption, business inventories continue to plummet www.briefing.com/Commo... (which subtracts from the GDP calculation), and rebuilding inventories (or even stopping the decline in inventories) will had hundreds of thousands [millions?] of jobs as well as significantly contributing to the GDP calculation (and perhaps when those people are working, they will add even more to consumption?). At least that is how it usually works after a recession ends...

Oct 30 01:01 PM

[Mad Hedge F...:]

afk Those of you who heeded my GLOBAL RISK ALERT on October 13(click here for report at www.madhedgefundtrader...) missed the top of the market by six trading days and 10 S&P points. I’m sorry; I’ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO’s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like “cash for clunkers” and the first time homebuyers tax credit, may be presenting one of those pristine, “sell on the news” moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

Oct 30 01:29 PM

[Bjarne Jensen:]

Everyone is anticipating inventory restocking both for the direct economic boost it will provide and the economic signal value. However, I don't see the anticipated restocking happening:

1st: and most obvious, I don't see how our economy will be helped by purchasing more goods from China. And 2nd: I question the size of the inventory restocking that will happen. Imagine that you are a car dealer that had a lot full of cars which sat unsold for nine months. Then 'cash for clunkers' unloaded much of your inventory and likely saved your company from bankruptcy. Do you really think that dealer is going to restock as many cars as he started the year with? No way! At best, dealers will order some cars to replace some of the best sellers. But I believe most dealers will refrain from restocking in any meaningful way until they see the Main Street economy improving.

OK, what about the retail Christmas shopping season: Container shipments during the Sept/Oct Christmas supply season were way down. Retailers simply are not stocking a lot of goods for this shopping season.

If we have lower Christmas sales, I am afraid we will see another, larger, round of store closing in the 1st qtr 2010.

Oct 31 03:54 PM

[thiazole:]

The destocking that occurred was a steady event that started in middle to late 2008 (did you even look at the chart I posted?). It isn't something that "just" happened with cash for clunkers.

Also, they don't have to restock to see the GDP increase. Inventories are falling at a rate that is over $15 billion/month. Does that make sense to you? Last year, there were $1.5 trillion in inventories and now there is $1.3 trillion and they keep FALLING. According you (as far as I can tell) companies are just going to let the inventories fall to zero? If not, then they will need to increase production JUST to stop the fall in inventories. That isn't "restocking".

And you think EVERYTHING we buy comes from China? China isn't even our biggest trade partner - Canada is. You grossly overestimate just how much we buy from China. In the long term, if the trade deficit with China continues, it will continue to eat at the dollar and our economy, but if you think inventory restocking here "just" means buying more goods from China, then you need to review your numbers again. Retail sales are clicking at around $350 billion a month. Our net imports from China are around $15 billion a month.


On Oct 31 03:54 PM Bjarne Jensen wrote:

> Everyone is anticipating inventory restocking both for the direct
> economic boost it will provide and the economic signal value. However,
> I don't see the anticipated restocking happening:
>
> 1st: and most obvious, I don't see how our economy will be helped
> by purchasing more goods from China. And 2nd: I question the size
> of the inventory restocking that will happen. Imagine that you are
> a car dealer that had a lot full of cars which sat unsold for nine
> months. Then 'cash for clunkers' unloaded much of your inventory
> and likely saved your company from bankruptcy. Do you really think
> that dealer is going to restock as many cars as he started the year
> with? No way! At best, dealers will order some cars to replace some
> of the best sellers. But I believe most dealers will refrain from
> restocking in any meaningful way until they see the Main Street economy
> improving.
>
> OK, what about the retail Christmas shopping season: Container shipments
> during the Sept/Oct Christmas supply season were way down. Retailers
> simply are not stocking a lot of goods for this shopping season.
>
>
> If we have lower Christmas sales, I am afraid we will see another,
> larger, round of store closing in the 1st qtr 2010.

Nov 01 09:28 PM