The current state of the U.S. economy can be defined by one word; paradox. The definition of a paradox is a seemingly true statement that leads to a contradiction or a situation which seems to defy logic or intuition.
This seems to be the appropriate label for the economy after we analyze the economic data released last week, coupled with the consumer sentiment data.
The Commerce Department released retail sales figures last Friday for the month of September. The 1.1 percent increase was much better than the 0.6 percent expected. Excluding autos, sales were up 0.6 percent compared to an expected increase of 0.3 percent. Both figures were ahead of growth rates from a month ago.
In addition to this data, last week the Labor Department reported a 0.2 percent increase in workers’ hourly earnings in September, compared to a 0.2 percent decrease the month prior. Nonfarm payrolls showed a 103,000 increase (though the number did receive a boost from the 45,000 striking Verizon workers going back to work) so there were some positives there as well.
What totally throws me is if people or spending more money and making a little more money in addition to jobs being added; then why is consumer sentiment getting worse, especially in regard to employment outlook?
The Thomson/University of Michigan preliminary index of consumer sentiment for October showed a drop to 57.5 from 59.4 in September. The result was a disappointment as economists expected an increase to 60.2 (which seems justifiable considering the data mentioned earlier).
According to the survey, the gauge for current economic conditions fell to 73.8 from 74.9. Additionally, consumer expectations fell to its lowest level since May 1980, at 47 from 49.4. What’s more is the expectations gauge has faded more than 20 points since the beginning of 2011.
So my question becomes this; if consumer sentiment is falling in regard to the current state of the economy and their outlook is worsening as well, who exactly is spending more money?
In addition to that contradiction is the fact that 39 percent of consumers said that income declines were the reason for their finances worsened. Recall, this report come out after a month showing an increase in average worker earnings.
If you are confused about the outlook for the U.S. economy, don’t sweat it, because I am too!
The below chart muddles it up even more:
Do you see the trend starting around 2008, retail sales soaring and consumer confidence languishing? Apparently the economic paradox has been going on for some time now.
I don’t want to discount the strengthening retail sales numbers of late, but a quick top level analysis may give us some clarity on why sentiment is not matching results. A majority chunk of the sales growth came from autos and gas. When looking further into those sales, data (produced by Goldman Sachs) shows roughly 70 percent of growth in vehicle sales have come from businesses, not consumers since the auto sector bottomed a couple years back.
Along with that bit of information, I plan to keep an eye on the September consumer credit number to see if it increased after Americans cut down on debt in August. If spending received a bump from U.S. households taking on more debt, that would not be a positive. Hopefully this will not be the case, the change in revolving credit (credit cards) in particular is what to watch.
Your anxiously waiting end of the month data analyst,
Mitch Jaworski