Of all the ingredients one might use to cook up a bad brew for the economy, there's one set of spices on the rack that can guarantee recession. Everyone knows too little housing will leave the economy tasteless, but our taste buds are accustomed to that by now. Of course the demise of Europe and the slowing of China contribute their portion to the sorry stew. Yet, the key ingredient today is the consumer, who en masse, drives our economy. Well, three spicy data points, two of which were reported this week, and one that dominates all flavors, are brewing up some indigestion for America. One spice reflects the consumer mood and is trending lower on a weekly basis. The second reflects spending at chain stores and is marking a pace under inflation. The third directly measures consumer spending, which is definitely stalled. The three combined might be called "the trinity cuisine" for an unholy consumer infused economic witches brew.
Thursday, the Bloomberg Consumer Comfort Index declined 2.2 points to a mark of negative 41.9. The regular measure of the consumer mood, measured weekly, has been trending lower; the index has not climbed since the end of June. Ironically, retail stocks have performed relatively well since the close of June, with industry barometers Wal-Mart (WMT) and Amazon.com (AMZN) up 6.2% and 1.6%, respectively. Of course, company specifics come to play for both. Though, the Consumer Discretionary Select Sector SPDR (XLY) and the SPDR S&P Retail (XRT) are also up 1.6% and 1.2%, respectively, during that span. The performance marks against the 3.1% gain of the SPDR S&P 500 (SPY), so investors do seem to be growing wary of the consumer sector.
Evidence of deterioration is also clearly seen in comparison of the comfort index data over time. Last week, the index measured minus 39.7 and four weeks ago it was negative 37.5. This week's measure set the reading at a two-month low. Bloomberg's index does not stand alone either, with the Conference Board's Consumer Confidence Index sitting at a soft mark of 65.9 in July. That represented improvement over June, but I'm looking toward deterioration at the index's next reporting.
The International Council of Shopping Centers (ICSC) reports on chain store sales weekly, and I've noticed a disturbing trend in the data. Sales have been tracking at a snail's pace, and not only on a weekly basis, but against the prior-year period as well. In the latest report covering the period ending August 4, the ICSC reported sales unchanged against the prior week. Data from the week before showed a 1.7% drop from the week before that.
You might want to blame the slide on seasonal patterns, after all it is August, and still early for back-to-school shopping. The problem is that on a year-to-year basis, sales only increased 1.4% in the latest period, following the prior week's 1.8% rise. The numbers have been in about this range, and it's reminiscent to me of the depths of the recession that followed the financial crisis of a few years ago. A pace of 1.4% is not even keeping up with inflation.
The environment has not been hospitable enough to support all of America's retailers, and so those who venture on a new strategic path, like J.C. Penney (JCP) has, face considerable risk. But, even for retailers operating traditionally it's been hard, as evidenced by the issues at Sears Holdings (SHLD) for instance.
What the ICSC does not so obviously capture is the market share gains of sellers on the Internet that offer shoppers best prices on new and used goods. Non-store retailers and platform operators like Amazon.com, eBay (EBAY) and Zappos have had an impact on the traffic in America's malls. What also impacts the sales figures is the move of shoppers to lower priced goods. So as Dollar Tree (DLTR), Family Dollar (FDO) and Dollar General (DG) attract business, along with Wal-Mart, Target (TGT) and Costco (COST), the total dollar sales figures are impacted and reduced. It's easy to also ignore the move to even less traditional retail options, like that offered by pawn shops including Cash America (CSH).
The results of department stores like Macy's (M) and Kohl's (KSS) reflect the difficulties of the environment, but also the marketing wisdom and operational skill of the same. There will be winners and losers in tough times, as sparse spending sifts through the wide variety of retail stores and strategies.
And sparse spending is a reality. Consumer spending has stalled; there is no doubt about it, as indicated by the June Personal Income & Outlays Report, which offered a clear recession signal roughly ten days ago. The data for the month of June showed personal spending was unchanged. Even as prices rose, spending stopped, whether you exclude changes in food and energy prices or not. When adjusted for price changes, the data showed real personal consumption expenditures declined by 0.1% in June, versus a 0.1% increase in May. While durable goods purchases increased 0.1%, purchases of nondurables declined by 0.4% and purchases of services fell slightly as well. These are the facts.
The reasons for consumer spending tightness are obvious. As confidence wanes with European recession and crisis littering the daily headlines, and now with Chinese growth slowing, Americans are too fearful to spend. We hear of a "fiscal cliff" approaching in the near-term and a catastrophic entitlement finale ahead of us. Who would take chances with that kind of perspective? And the tangible reality of today is no better. Gasoline prices are on the rise. Unemployment is stuck above 8% and it even increased in July. This as GDP slows. And what seems the only hope, the stimulating actions of the Federal Reserve are said by some to be useless and by others to be undermining of the dollar. We look back at the Fed's actions to date, and while perhaps rescuing us from depression, they've not restored prosperity. Major mortgage lenders like Bank of America (BAC) are even lending less in that regard, as they resolve issues with outstanding loans. We cannot say the product market is stale either, with new and innovative products flowing from consumer pleasing companies like Apple (AAPL), and top notch entertainment emanating from the likes of Disney (DIS).
Based on its rising price, it would seem the thing people are most interested in buying is gold, which is mankind's go-to asset for crisis by the way. Spot gold at $1621 is higher today than it was yesterday, which was higher than it was the day before. The SPDR Gold Shares (GLD) was up another 1% this week, so it is in demand. Maybe J.C. Penney should start selling gold bars and coins and Research in Motion (RIMM) should start plating its BlackBerry with it.
Recession is upon us friends, because the consumer ingredient has been added to the witches brew. The signs are obvious beyond just the consumer key though. A glaring recession signal just flashed red last month, and a slew of anecdotal evidence is compiling. For investors, it looks to me a great time to fast.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.