Do Poor Consumers Drive Recoveries?

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Includes: DIA, QQQ, RTH, SPY
by: Steven Hansen

Past American recoveries have been driven with a combination of consumers and a healthy financial sector. The fourth month of YoY increase in retail sales has flamed some pundits' belief the consumer is coming back to the economic table. It is impressive:

  • November 2009: 2.5%
  • December 2009: 5.4%
  • January 2010: 2.6%
  • February 2010: 4.2%

Consider a comparison to peak sales months two years ago. It does not appear Goldilocks scheduling an appearance:

  • November 2009 vs November 2007: -8.8%
  • December 2009 vs December 2007: -4.2%
  • January 2010 vs January 2008: -6.5%
  • February 2010 vs December 2008: -9.0%

To adjust for population growth, 2% should be added (population growth is 1% per year). So on average the consumer end of the economy is running at 9% under the level of 2 years ago (or 7% if you ignore population growth)..

My take is the consumer feels poor. Most analysts' take from the 4Q 2009 Federal Reserve's Flow of Funds was that the asset base of consumers was improving. But for most consumers, their asset portfolio is only their home. Home values declined according to the Fed in 4Q 2009.

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What is not ignored by most is that the home values are beginning to decline again, and that there is no consideration of the net worth of the consumer.

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When people feel poor they do not spend money. The good news on the above home equity graph which shows improvement during 2009 was caused by foreclosures (underwater mortgages).

It does appear that foreclosures are helping our economy.

Old Trader has an interesting take on the effects of defaults (Deleveraging Or Defaulting: Whither The Consumer?):

As we all know, that hierarchy has been turned on its head, as foreclosures, jingle mail, etc., have grown by leaps and bounds. Doing some simple "sums", if a consumer defaults on $20k of credit card debt, and has stopped paying his mortgage (with the bonus of being allowed to stay in the home, as the foreclosure process drags on), $600 of CC minimum payments, plus, say $2k/ mo. of mortgage payments, means that the consumer now has at least $2600/mo. in "free cash" to spend (assuming, of course, that they still have a job).

Maybe there is a very positive benefit to ramping up the foreclosure process.

Disclosure: None relating to this article