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Lance Roberts
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After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a silent partner for an RIA in Houston, Texas. The... More
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  • What "Average Joe" Really Thinks

    Every day we are blugeoned with a variety of economic reports from various government agencies about the state of the economy.   Most of these reports have some form or another of "seasonal adjustments", speculations, estimations or just flat out "guesses" about what is going on in the economy.   What we tend to find out over time is that these numbers are generally overly optimistic during recessionary periods as we are in today.

    Today, we are going to look at three different polls from the Gallup organization on consumer spending, the economy and employment.   The Gallup organization has studied human nature and behavior for more than 75 years and focus on what people "think and feel" about various issues.   They employ many of the world's leading scientists in management, economics, psychology, and sociology, and other consultants to identify and monitor behavior.

    The key difference between Gallup and the various government agencies is that these polls are direct questionnaires to individuals and the responses are tallied and reported.   There are no adjustments, assumptions, guesses, etc.   In the famous words of Bill Clinton; "What"


    So, with that in mind, let's start by taking a look at the consumer spending poll.  In the recent 3rd quarter GDP report we saw the personal consumption expenditures made up a very large portion of the increase in GDP.   While the media trumpeted the consumption as a return of the consumer the reality was it was spent on utilities and healthcare rather than "other" types of consumption.   

    This clearly shows up in the consumption spending of average Americans that were polled by Gallup.    The consumer spending poll tracks the average dollar amount Americans reported spending or charging on a daily basis NOT COUNTING the purchase of a home, auto or normal household bills.   Therefore, this survey strips out the spending on utilities and focuses on the actual purchases of "stuff" that drives final demand for businesses.   As you can see there has been virtually no movement in the index since the recession took hold in the U.S. which is indicative of their attitudes that we never left a recession to start with.

    More importantly, the index was at 81 at the beginning of July when 3rd Quarter GDP started and ended the 3rd Quarter period at 59.   So, while GDP reported a surge in Personal Consumption Expenditures (PCE) in the first "ESTIMATE" of 3rd quarter GDP; the Gallup survey of consumers actual spending patterns DECLINED by 27% during the same period.


    Not surprisingly, employment plays a big factor in consumer spending.  If the consumer is unemployed or underemployed they tend to have less money to spend.   Therefore, this shows up in consumer spending patterns.  While the Bureau of Labor Statistics does a lot of estimating with seasonal factors and "birth/death adjustments" when reporting employment and unemployment in the U.S.; the Gallup survey simply asks individuals in they are under-or unemployed.

    Gallup's U.S. employment measures report the percentage of U.S. adults in the workforce, ages 18 and older, who are underemployed and unemployed, without seasonal adjustment. "Underemployed" respondents are employed part time, but want to work full time, or they are unemployed. "Unemployed" respondents are those within the underemployed group who are not employed, even for one hour a week, but are available and looking for work. Results for each 30-day rolling average are based on telephone interviews with approximately 30,000 adults.   The BLS report includes individuals that are 16 years and older and uses seasonal adjustments for comparison.

    While the number of those directly unemployed has fallen from the peak of when this poll was began at 11% to 8.5% today the number of individuals that are underemployed has fairly stagnant and close to its peak of just over 20%.    The recent decline in the percentage of unemployed does confirm the recent slight upticks in hiring seen in the recent employment reports.   However, it also shows that a lot of that hiring may be occurring in areas that are part time or lower paying wage jobs as shown by the larger uptick in the "underemployed" status recently. 

    Regardless, the levels of unemployment and underemployment are high, and while recent improvements are encouraging, any economic shocks could send these numbers higher in a hurry.   Notice the spikes in both reports early in 2011 as the economy was struggling through a very weak patch.   With the "super committee" now effectively out of commission and automatic spending cuts looming that will subtract from GDP growth, international worries and a potential recession in the next year there are plenty of catalysts to send workers back to the unemployment line.   This leads us to the confidence in the economy as a whole.

    Economic Confidence

    Gallup's economic confidence survey which is the combined responses to two questions: 1) rate the economic condition of the country today, and; 2) is the economic condition getting better or worse, really ties into consumers employment status and their ability to live.    The chart compares the results of the economic confidence survey to the S&P 500.   What is important to note is that economic confidence is closely tied to the performance of the S&P 500.  

    This was "The Bernank's" direct remarks when launching QE 2 in 2010 when we said that by targeting asset prices it would boost consumer confidence.  He was correct.   As the market rallied consumers expectations about the economy improved but unfortunately there ability to consume didn't improve along with it.

    However, there is another way to look at this chart.   The economic survey has tended to be a leading indicator of the economy as a whole and the markets.   The last time that the survey had declined to these levels the economy was mired in a deep recession BUT the market was still near its highs.   As we have discussed in recent missives on the economy, and as confirmed by the ECRI, we are likely in, or about to be in, a recession.   If that analysis is correct then the economic survey may be confirming the same which means the stock market has some catching up to do.

    It's All About The Consumer

    While we watch the almost daily deluge of government reports that the media focuses on from one minute to the next it is important not to forget that it really all revolves around the consumer and primarily the small businesses that make up the bulk of hiring in the country.  With real incomes declining, debt burdens stripping cash flows, home values falling, international turmoil, domestic political infighting and concerns about keeping a job if they have one, or finding one if they don't, there are not a lot of positive inputs to spur a strong consumer driven recovery.   This lack of demand by the consumer is also why small businesses have no appetite for obtaining credit, increasing production or expansion of hiring beyond absolute necessity.  

    So, while "Rome burns" and our government "fiddles" while warring amongst itself over what policies to enact, where to cut spending or how to increase revenues it is important to remember that there are "real" people affected by the decisions made and actions taken.   This is why I find the Gallup polls interesting - it is the voice of the "average American" ringing through and it is only a shame that our leaders aren't listening.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Nov 10 2:35 PM | Link | Comment!
  • Oil Price Spikes "Feel" Worse - Update

    On July 8th, 2011 we wrote a post entitled why Oil Price Spikes Feel Worse wherein we stated that "Today, more now than ever, we are barraged with economic data of which most is lost on the average person. One data point, however, that everyone understands is the price of oil as it directly impacts the average American where it counts the most, in the wallet. The price of oil cannot be escaped as it is plastered just about everywhere these days whether it is the current Administration admonishing oil and gas drilling companies, headlines in newspapers or on the internet and, ultimately, you see it at the gas pump. Oil prices affect us every day in more ways than just what we are paying for gasoline, of course, it also affects everything that wear, consume or utilize from hard products to services due to rising input costs, fuel surcharges, etc."

    This has become more prevalent lately due to the decline in real personal incomes and the rising cost of food and energy which is consuming more of those incomes in percentage terms.   As we stated in our recent report on 3rd Quarter GDP:  "When food and energy are already consuming more than 23% of wages and salaries; things are tough."

    This is one reason that when the government reports the consumer price index (NYSEARCA:CPI), and then strips out food and energy to report core inflation, it almost always elicits a negative response. This was evidenced by the response to Fed President William Dudley who got a street-comer education in the cost of living. Back in March, on a Fed Reserve campaign to sell its monetary policy to "average Americans"; Dudley tried to explain that while commodity prices are rising other prices are falling.

    "Today you can buy an iPad2 that costs the same as an iPad 1 that is twice as powerful, you have to look at the prices of all things."

    The reason that the "average American" can't grasp things like "hedonic"adjustments to the inflation index, or even the idea of stripping out volatile food and energy components of CPI to get a core index, is because they live in a world where their daily lives are fixed to the disposable personal income they bring home. The average American gets a paycheck and then has to buy gas and food, pay rent and insurance, buy clothing, and pay for utilities.  This is why Bill Dudley was immediately lambasted by the reporters in the audience following his iPad statement with; "I can't eat an iPad" and "When was the last time YOU went to a grocery store?"

    While there has been a lot of pandering about high oil prices, and ultimately high gasoline prices, what is more important to note is how do these price increases in oil "feel" to the average American. The thing that the Fed misses, in my opinion, is that the average "American" is dealing with a lot rising cost pressures that aren't necessarily included in the inflation calculation. Furthermore, while prices of things like oil, commodities, college costs, insurance, healthcare, etc. have been rising; disposable personal incomes have been falling. Therefore, each price increase that occurs has a larger and larger net effect on the limited amount of disposable personal incomes available to the consumer.

    This is why most consumer polls show that consumers "feel" like we are still in a recession. To those individuals a recession is equivalent to not being able to make ends meet at home. When the consumer is under pressure at home they tend to buckle down and reduce consumption. This is specifically why we are seeing such a lack of final demand from the consumer on small businesses.  This in turn is keeping them entrenched in a defensive position by not hiring workers or expanding production.

    The first chart above shows inflation adjusted oil prices over inflation adjusted disposable personal income and oil prices. Since oil prices are a direct input cost into so many different aspects of the daily lives of the average "American"; price spikes in oil have a very real impact on the way that consumers "feel" about their ability to make ends meet.

    What we find is that when oil prices spike there is an immediate shock to the disposable personal incomes for individuals. For example, during the Iran crisis oil peaked at $110 per barrel for consumers, however, it "felt" like $229 a barrel. Then at the peak of the oil market in 2008 when oil traded for $140 a barrel it felt much closer to $253 as real disposable incomes had declined. In July, when I last penned this update oil traded at $96 a barrel as it does today.  The difference at that time was that it "felt" like it was closer to $119 versus $103 today.

    This psychological "cost pressure" obviously impacts the way that consumers behave with their money.  While the government tries to massage the differences in inflationary pressures to suppress adjustments to Social Security and Medicare; the average American is rapidly coming to grips that there is something entirely wrong with the state of affairs in the U.S. economy.  At some point the process of kicking the can down the road will meet its inevitable conclusion in this game of chicken as the process of deleveraging continues.

    Furthermore, with the economy already weak, this is poor timing for oil prices to be surging higher from below $80 this summer to $96 currently.  That 20%+ increase in costs will begin to crimp already weak consumer spending as we head into the very "hopeful" holiday shopping season.   The economy is a long way from being out the woods and the impact of rising oil prices, when overlaid with declining incomes, just doesn't "feel" like it is going to be a good thing.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Nov 08 12:22 PM | Link | Comment!
  • Food Stamp Usage Hits New Record
    "Give me your tired, your poor,
    Your huddled masses, yearning to breath free,
    The wretched refuse of your teeming shore,
    Send these, the homeless, tempest tossed,
    I lift my lamp beside the golden door."

    I am not sure that when the Statue of Liberty was built and that poem inscribed on its base that anyone ever believed that the tired, the poor and the huddled masses would be within the very boundaries of this country.   A country that stood for so long as the very symbol for the freedom, capitalism and liberty that the entire world longed for.

    The torch that stood for opportunity and refuge has since been dimmed as the reality of the near homeless and "tempest tossed" are struggling to make ends meet.   This was never so prevalent as the recent release of the August data of the Supplemental Nutrition Assistance Program (SNAP) which is more commonly referred to as food stamps.

    As of August there is now an all-time record of 46 million individuals utilizing the SNAP program which, assuming there are roughly 190 million working age Americans, that is 1 in 4 working age individuals tapping food stamps.  Of course, as we showed in our recent report on the 3rd Quarter GDP , the average household is seeing nearly 23% of their wages and salaries being consumed by food and energy costs alone.  Furthermore, as inflationary pressures rise there is much less disposable real income available to make ends meet but this becomes even more difficult when real incomes have declined on a year over year basis.  The reality is even worse when you realize that more than 20% of those personal incomes are made up of government transfers today.

    The culprit of the demand on food stamps is obvious.  A deteriorating economic growth rate has led to higher levels of unemployment.   As we have pointed out many times in the past the last 30 years of deficit spending and excess credit creation have led to the end of "Keynesian Economic Experiment."  That massive expansion of credit led to a long period of mal-investment combined with the destruction of personal savings fed the economic malaise.  That is just the reality of where we are today.

    Unfortunately, there is no quick and easy remedy to fix the current situation as we face the beginning of a long hard road of debt deleveraging.  This cycle, which takes 10 years on average to complete (and this could well be a longer one than average) is required to clear the excesses from the system.  In turn, this clearing of excess from homes, mortgage debt to credit card debt will allow the economy to grow again on an organic basis as consumers can return to normalized consumption patterns.

    While governments around the world strive to bail out the banks and keep the world from defaulting on its obligations; the masses of citizens struggling to make ends meet amidst the ever tightening stranglehold of debt and unemployment continues.  Will it get better?  Absolutely.   It will take time, a bit more pain and the realization by our leaders that the path they are on does not lead to prosperity.  Only then will things truly begin to get better and the torch that symbolized America's greatness will once again burn bright.   In the meantime there will be an increasing level of demand food stamps, as well as support from the government itself, to make ends meet.  However, this becomes particularly troublesome as the government tries to figure out ways to cut spending, increase revenues and get the economy growing again.  It is a virtual spiral that ultimately ends up in a collapse unless tough choices are made.   The end game to all of this still remains that we have the opportunity to make tough choices to put America on the glide path to recovery because if we don't make those choices voluntarily, and soon, they will be made for us.   Just ask your favorite Greek.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Nov 02 3:44 PM | Link | Comment!
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