When consumers receive an income, those funds can go into savings or spending. Consumer spending is the measurement of funds dispersed (not in savings) and that can go into goods and services that consumers deem warranted. This can include durable goods, such as washing machines, and non-durable goods, such as food. As the U.S. economy is comprised of over 70% consumer spending, this is a very important piece of economic data.
The rate on a 30-year fixed mortgage has been creeping up higher and just broke the four-percent threshold. This is a telltale sign that higher financing rates are on the horizon.
While there’s still hope that the Federal Reserve will hold off on reducing its bond buying at next week’s Federal Open Market Committee (FOMC) meeting, the reality is that the money party is coming to an end.
The failure of the Bank of Japan to deliver additional stimulus sent traders to the exits and resulted in the Nikkei 225 dropping down to below the key 13,000 level. What happened in Japan may be an ocean away, but the knee-jerk reaction was clearly indicative of nervousness among traders.
The reality is that interest rates are heading higher. It’s just a matter of time, so you better be prepared for the move, because it will affect investors’ portfolios, home sales, consumer spending, and the carrying cost of the massive debt levels consumers have accumulated during this period of cheap money.
Even worse, governments from municipal to state to federal will be facing a cash crunch when yields and interest rates ratchet higher. In many states, we are already seeing debt issues that are threatening to explode when interest rates rise.
Case in point: California and its municipalities have amassed a debt load of about $848 billion, which could eventually be eclipsed by $1.1 trillion, according to The California Public Policy Center. (Source: “Report: California’s Actual Debt At Least $848B; Could Pass $1.1T,” CBS web site, May 1, 2013, accessed June 13, 2013.) This is scary news; furthermore, there are 1.64 million … Read More
Federal Reserve Chairman Ben Bernanke may be getting ready to sail off into the sunset as his reign as the top banker in the world is likely coming to an end.
The speculation is that it is doubtful Bernanke will decide to extend his stay as head of the Federal Reserve for a third term at the time his current term finishes at the end of the year.
While Bernanke has helped to save the economy from a deeper recession, he has also created a climate of easy money and massive debt loads that pose their own risks.
What we know is that the economy has recovered under Bernanke’s easy monetary policy.
He has helped to save the big banks, and he will be rewarded by Wall Street, which I will discuss later.
The availability of record-low interest rates by the Federal Reserve has helped to drive up the demand for mortgages and loans. The result has been a marked recovery in the housing market and consumer spending.
Of course, the problem is that the personal debt loads have surged. Recall what happened when the 30-year mortgage rates edged higher in recent weeks on speculation that the Federal Reserve would cut its bond buying at its June meeting: the stock market took a beating as capital shifted into gold and cash.
Loans to companies have been surging. There were $1.53 trillion in commercial and industrial loans in the first quarter by U.S. banks, up 12% year-over-year. (Source: McLaughlin, T., “Surge in U.S. commercial lending raises bubble worries,” Reuters, June 10, 2013.) The amount of lending is a concern given the … Read More
Japan is currently on cloud nine, with exports bursting out of the gate and Japanese stocks flying high. The benchmark Nikkei 225 index in Japan is up a whopping 48% this year.
Fueling the massive climb in the stock market has been the steady decline in the value of the Japanese yen triggered by the significant money printing by Prime Minister Shinzo Abe’s strategy to inject $2.4 trillion into the Japanese economy over the next decade.
It’s the same everywhere you go around the world. Money printing triggered by record-low interest rates and major monetary and fiscal stimulus is driving the economy and spending.
Yet what about the impact on the inflation rate of the importing country?
The devaluation of the yen against the greenback and other major global currencies makes Japanese goods much cheaper for foreigners, but it also creates a higher inflation rate for Japan.
In the chart below, the gap (as indicated by the blue oval) that has developed between the yen (as shown by the red candlesticks) and the U.S. dollar (as reflected by the green line) is clearly shown. In my view, while Japan is currently seeing growth, the country’s strategy is risky.
Chart courtesy of www.StockCharts.com
The widening gap between the two currencies will present problems in the future for the Japanese consumer due to the rising inflation rate.
Let me explain: the weak yen translates into higher prices paid for imports as more yen are required to pay for the same goods now than in the past.
For now, import prices are starting to edge higher—slowly but surely.
Over time, if the yen … Read More
All of the talk about the negative impact of the sequestration on consumer spending appears to have some validity.
While the rich consumers are continuing to spend on luxury items, those who are making less money and are influenced by the fragile jobs market and flat income levels continue to worry, which could likely impact consumer spending going forward. The effects of this, along with the widening gaps between the rich and the poor and the middle class are affecting consumer spending by Americans. In fact, we are seeing a widening income gap in many countries around the world, so it’s not just an American phenomenon—its impact on consumer spending is global.
Wal-Mart Stores, Inc. (NYSE/WMT) is a good barometer on the state of consumer spending around the world, especially with the lower- to middle-class consumers.
The company reported its results last Thursday, and it seems like Wal-Mart is facing some hesitation in consumer spending.
In the fiscal first quarter, the company’s net sales grew a mere one percent year-over-year to $113.4 billion, which was below the Thomson Financial consensus estimate of $116.4 billion. The sales reading was also shy of the low range of the estimate of $114.6 billion.
The low-cost retailer blamed the decline in consumer spending on a delay in tax refunds, adverse weather, and the rise in payroll taxes. The key comparable U.S. store sales fell 1.4% for the 13 weeks ended April 26, 2013, which represents the first contraction in this key metric in many quarters.
My concern is that Wal-Mart is facing sales pressure at a time when money is cheap. What will happen … Read More
Consumers appear to be holding back on buying non-essential goods, and this could impact the economic recovery.
The durable goods orders contracted a dismal 5.7% in March, according to the United States Census Bureau, representing the largest decline in seven months—a far cry from the 4.3% rise in February and well below the Briefing.com estimate calling for a four percent decline.
Taking out the volatile transportation portion, durable goods fell 1.4%, versus the Briefing.com estimate of -0.1%, equaling the second straight month of declines.
The durable goods readings have largely been inconsistent, as reflected in the chart below, and suggest the economic recovery may be at risk.
Chart copyright © Lombardi Publishing Corporation, 2013;
Data source: United States Census Bureau, April 25, 2013
When consumers are more confident, they tend to spend more on major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact the economic recovery, gross domestic product (GDP) growth, and the ability of companies to expand their businesses.
But whether it’s the added taxes or the fragile confidence from the lack of strong jobs growth, the decline in the demand for goods that are deemed non-essential should be a red flag that not everything is proceeding along smoothly, which could affect the economic recovery.
The fact remains that jobs creation is fragile and not expected to ratchet higher until 2014 and 2015, due to the slow economic recovery.
The recent 88,000 jobs created in March was weak, so it will be interesting to see what happens with the April non-farm payrolls reading due next Friday.
Retail sales have also been … Read More