Three consumer related economic data points reached the wire this morning, and one of them is especially concerning to me. Because of what is leading the market lower today, I believe they are playing a key role in the declines in the SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA) and the PowerShares QQQ (QQQ) today (aka the market). Unfortunately, the popular press has not noticed, due to their preoccupation with one specific data point that served to divert their attention today.
Getting right to the meat of the matter, its consumers I'm concerned about, and their spending patterns that trouble me. It's the reason the consumer discretionary sector is leading the market lower today - the Consumer Discretionary Select Sector SPDR (XLY) -0.7% and the shares of major consumer dependents, Amazon.com (AMZN) -1.9% and Wal-Mart (WMT) -0.2%, are down today.
At 8:30 AM EDT this morning, the government published the Personal Income & Outlays Report for the month of June. Personal spending was unchanged in June, despite price rise including and excluding food and energy, so without synthetic skew. Do you hear me? Consumers stopped their spending growth. Economists had forecast just a 0.1% increase for June, with the range of views extending from 0.0% to 0.3%, according to Bloomberg's survey. So, the spending data came in at the low end of economists' expectations. Those same economists are warning their in-house sector strategists about that information today, and eventually, your broker at Merrill Lynch (BAC) will get the news to you with a change in their recommended stocks away from your old favorite consumer stocks like Apple (AAPL) (I like Apple here) and into defensive ideas like Procter & Gamble (PG) (but I like defensive names too). This data is a tangible measure of consumer spending, and one that everyone who matters watches. It's the most important reason for stocks to sell off this morning.
The other bit of important news found in the report, as far as I'm concerned, is the Core PCE Price Index, the Fed's favored inflation measure. It was forecast to rise 0.2% in the latest period, and it showed prices rose 0.2% excluding food and energy. The headline price measure, the PCE Price Index, also rose 0.1%, against expectations for the same. The most important information to gleam from here is that price change played an insignificant role in the spending patterns of consumers. So consumers really did stop spending - be afraid recession watchers, be very afraid.
Directly from the Report:
Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in June, in contrast to an increase of 0.1 percent in May. Purchases of durable goods increased less than 0.1 percent, in contrast to a decrease of 0.4 percent. Purchases of nondurable goods decreased 0.4 percent, in contrast to an increase of 0.2 percent. Purchases of services decreased less than 0.1 percent, in contrast to an increase of 0.1 percent.
And the news gets worse… Last month's consumer outlays data was revised to reflect a decrease of 0.1% in consumer spending, which was a downgrade from the previously reported "no change" for May. So we have two months of consumer stall. Do you remember what I always tell you comes before recession? It's the slowing and stopping of our behemoth of an economy, and that's what is depicted here.
Now, the reason the market has not picked up on this important news yet is because of the day's Consumer Confidence Index, which is an intangible measure of consumers versus the aforementioned tangible measure. The Conference Board's Consumer Confidence Index release featured a headline that read, "…Consumer Confidence Increases After Four Consecutive Declines." Unfortunately, that headline led fast writing reporters to focus on what seems important information. They are mistaken!
The Confidence Index rose in July, to 65.9, from a revised 62.7 in June. Economist had been looking for the index to fall to 61.5 in this latest check. Debunking this is relatively easy friends, as the Present Situation Index actually declined in July, while the Expectations Index leapt forward. The Director of Economic Indicators at the Conference Board, Lynn Franco, wisely stated, "… consumer confidence is not likely to gain any significant momentum in the coming months." She cautioned readers from the exact misunderstanding they digested anyway. If you examine the report, you find that the index sits at a historically depressed state, and really reflects a bad mood.
The third data point is relevant because it is tangible and because it is current. The International Council of Shopping Centers (ICSC) reported weekly same-store sales fell 1.7% in the week ending July 28. That was probably affected by weather, but the year-to-year sales pace, measured at +1.8% this week, continues to depict a pace of sales growth not exceeding inflation. The Core PCE Price Index increased 1.8% year-to-year in June. This means that my advice recently to be selective in your retail investment decisions continues to play true. Ideas like J.C. Penney (JCP) and Sears (SHLD) remain out of my favor, while I direct you to discounters like Dollar Tree (DLTR), eBay (EBAY) and Wal-Mart.
This is just the latest in a series of recession signals found in regular economic data and corporate news over recent weeks. We are tracking them here, so simply continue to follow this feed for my ongoing analysis of critical economic data points.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.