Will Consumer Woes Kill The Pre-Thanksgiving Rally?

by: Caleb Sevian

The week following Thanksgiving marks the beginning of the shopping season. Traditionally this season has meant higher stock prices as well. With unemployment lingering at 4.4%, wage growth finally showing some signs of life last month at 3.9% and gasoline prices falling as much as 30% in the last few months, consumers whose spending on goods contributes in excess of 25% of our GDP should feel like spending, right?

Even with the slump in housing prices most consumers probably think, "I have a job, I am earning more money than I did last year and it’s less painful to fill up my gas tank than it was this summer, so I might as well spend." The initial reports from the Associated Press confirms this hypothesis with its report on initial Black Friday sales numbers up 6% over 2005.

The Wall Street Journal conducted a couple interesting surveys this week. The first was about GDP where 56 economists were surveyed and reduced their Q4 GDP estimates to 2.3% from 2.5%. Personally, I think 2.3% is optimistic given the continued drag by the housing sector. Though as I’ve mentioned before I believe the problem will be contained and will not spread to the broader market. The other survey was even more interesting and had to do with housing, where 49 economists were surveyed and revealed that by a ratio of 2-1 they expect the worse of the housing sector correction is over, though they still expect modest housing price declines next year.

The National Association of Home Builders survey backed up this notion by showing up ticks in both builder sales and expectations. There were even some industry comments out of Toll Brothers indicating they are seeing some stability. I think the smartest economists are hedging their bets by saying that in areas where there is still over supply the housing market is vulnerable.

Let’s hope Black Friday’s robust shopping boom holds up, though with retail sales at an inflation adjusted rate of 3% growth many economists still worry that it won’t be enough to sufficiently boost spending to support GDP estimates. A further worry creeping into the markets was the consistent theme in the press last week that consumers will be looking for big discounts this season and will not open up their wallets until they see them. The elephant in the room showed up on Friday when the dollar began to sag against the Euro breaking the important 1.30 level. Given that the next move in rates in the US is likely down and the next move in the Euro Zone is likely up, it looks likely the dollar will continue to fall.

The equity market sold off on Friday based on this and probably rightfully so. An intense sell off in the dollar could jeopardize foreign bank reserves of dollar denominated instruments and ultimately lead to higher interest rates and inflation. Next weeks visit to China by the Treasury Secretary and the Fed Chief is viewed as an important step but little is likely to come of the trip.   

But enough of my talk, here’s a little linkfest so you can scour the statistics for yourself:

Hulbert contrarian view- traders too bullish

The worst of the housing bust is over

Fosback’s econometric model tips to the positive

Council of Economic Advisors take GDP forecasts down

New Fed Governor grapples with growth vs. inflation issue

Consumer spending, housing indicators and a few choice industry data points

Black Friday off to a good start

Refiners conspire to raise prices?