Granted, if you know me, you know I can tend to be a bit, ah, emotional. So, here’s a less caffeinated take on the state of the U.S. consumer from Bank of America/Merrill Lynch’s Ethan Harris, part of the bank’s research report today. The take-away is, yes, things have improved, but haven’t improved that much, and two major overhangs, housing and the crumbling fiscal picture at the state level, will continue to be a drag.
Good, but not that good
After dipping during the summer, US growth data have improved noticeably. The better data, combined with easy fiscal policy, have caused some fairly big GDP forecast revisions. We have added 0.6 pp to our 2011 forecast, and some competitors have been even more aggressive. Table 2 compares the December and January Blue Chip surveys.
Despite the revisions, we remain slightly below other major banks. In our view, while easy monetary and fiscal policy has provided plenty of caffeine to the economy, it still suffers from a severe hangover: Household and bank balance sheets are slowly recovering, but with bad loans well above historic averages and with the personal saving rate still low, a lot of work remains.
Both the housing market and state and local governments are still in the middle of their crises. We expect the housing market to languish until the foreclosure process begins to wind down. State and local governments will likely remain in recession for the next two years.
- Time’s Curious Capitalist blogger John Curran offers several themes to keep an eye on about current market conditions. “First, stocks are going nowhere,” he says, as there are lots of headlines and big moves in both directions, but the market is still flat year-to-date. Corporate earnings are way up, though mostly on cost-cutting. Oil prices are inching backing up, especially as dollar weakens. Consumer spending isn’t improving, savings rate is increasing and European debt crisis isn’t over.
- AOL’s struggling so much that it couldn’t even meet the Street’s diminished 2Q expectations. MediaMemo blogger Peter Kafka notes two important themes to watch: AOL’s ad business and rate of decline at its subscription business.
- Investors and consumers have been so conditioned to look out for inflation that the threat of deflation, particularly in housing and wages, isn’t being taken as seriously as it should be, Yves Smith writes at naked capitalism. “It is hard to prove in a tidy way, but I see more signs of discounting in the economy, even in goods and services aimed at upper income consumers supposedly unaffected by the downturn.”
- “Inflation expectations are falling and there is currently no end in sight,” notes David Beckworth, assistant professor of economics at Texas State University. “Let me be very clear what all of this implies: by failing to stabilize inflation expectations the Fed is effectively tightening monetary policy at a most inopportune time. I hope this is not how the Fed wants to be remembered.”
- Hackers have released their latest set of instructions to help iPhone 4 owners run their devices on multiple carriers.
- Bearish sentiment among advisers fell for a second-straight week, according to Investors Intelligence. Now, only 33% of the survey’s respondents say they are in the bearish camp. “While a decline in bearish sentiment is typical when equities rise, one could make the case that it should be lower,” Bespoke Investment Group says. “After all, the current level of bearish sentiment is the same now as it was when the S&P 500 was trading at it correction lows in early July.”
- “Maybe, just maybe, the thing to do is let the deleveraging/saving/expense cutting process take place,” Credit Writedowns says. “Just as forest fires are a part of the natural life cycle of forests, so is the cleansing and seeding process of an economic downturn.”
- Research In Motion’s (RIMM) Torch may be the best BlackBerry to date, but it’s not as good as Apple’s (AAPL) iPhone or the plethora of phones using Google’s (GOOG) Android software, Dan Frommer writes at Silicon Alley Insider. “The biggest problem is that RIM has not been able to build a mobile operating system that feels nearly as modern and elegant as Android or Apple’s iOS,” Frommer says. “As a result, even RIM’s newest phone feels old next to a new iPhone or Android device.”
- Oracle’s Larry Ellison joins other billionaires in following a call by Warren Buffett and Bill and Melinda Gates to pledge the majority of their wealth to charity.
- Mosque near Ground Zero gains approval, but opponents are expected to fight it in court.
- Greece’s historic bailout proves what many have believed for some time: Greece’s problems quickly turned into a “death spiral,” Paul Krugman says. “The EU has now, in effect, given up on trying to restore market confidence; instead, it’s going to break the death spiral by main force, providing Greece with all or almost all the financing it needs directly, at an interest rate much lower than the market was demanding.”
- The Greek bailout isn’t a bond cure-all as some investors expect government bond yields to keep increasing for many debt-laden countries, WSJ reports.
- Most asset classes saw minimal gains in April. But REITs were the lone exception, posting a 7.1% monthly return and have now gained 18% in 2010. At The Capital Spectator, James Picerno discusses whether they are they ripe for some profit-taking.
- Both consumption and spending rose in March, but spending growth outpaced income growth, forcing the savings rate down again to its lowest level in a year and a half. But “this isn’t the worst thing in the world,” Ryan Avent writes at The Economist’s Free Exchange blog. Not at least in the short-term.
- Newspaper ad sales are still falling, but the declines have significantly abated throughout first three months of 2010, Newsosaur blogger Alan Mutter reports.
- As the tiff between Apple (AAPL) and Adobe (ADBE) heats up, Microsoft (MSFT) weighs in, detailing its side of the debate.
- IPad 3G’s launch weekend was a success, though not as successful as original Wi-Fi-only release last month. Overall, Apple says iPad sales have already topped 1 million.
- US auto sales increased 20% in April compared to depressed levels a year ago as Chrysler, Ford and Toyota all reported sales up at least 25%.
- MarketWatch’s Mark Hulbert offers advice on how to gain exposure to financials without betting on Goldman Sachs (GS).
Paul Vigna and Madeleine Lim discuss the strong manufacturing and consumer spending data. But the savings rate drops to lowest level in a year and a half, a cause for concern. And Greece finally gets its bailout.
- Spiking interest rates shouldn’t be dismissed as an “irrelevant development,” especially if they continue rising at their recent pace, James Hamilton says.
- Short sellers deserve some vindication, especially for uncovering dishonest management, Barry Ritholtz says.
- Health-care reform sends out accounting ripples, FT Alphaville notes, as AT&T (T) as well as 3M (MMM), Deere (DE), Catepillar (CAT) and AK Steel (AKS) are all anticipating charges.
- Obama’s health-care victory has “breathed new life into his administration” and energized Democrats. His next “big thing” should be focusing on jobs, former labor secretary Robert Reich says.
- “Relative to every previous recession since 1948, the current hole in lost jobs is unusually deep,” James Picerno says. “In addition, the trend in job destruction this time suggests that repairing the damage will take longer compared with the past 60 years of economic recovery.”
- Trading in the weeks before and after Easter may not be as quiet as many think, Bespoke notes.
- “Against all the odds, a glimmer of hope for real financial reform begins to shine through,” former IMF chief economist Simon Johnson says.
-High income disparity leads to low savings rates, Yves Smith writes.
- “The problem is regulating shadow banking — non-depository banking,” Paul Krugman says. “So right from the beginning we have the problem of deciding what is a bank, and what liabilities need deposit-type guarantees.”
- “The Fed will take comfort in the inflation statistics even though the energy component in particular will reverse higher in March,” Miller Tabak’s Peter Boockvar says. “But income growth running higher by 2% y/o/y with spending up 3.4% y/o/y can only last for so long with access to credit not what it used to be.”
- Don’t blame the Fed for the jump in mortgage rates, Paul writes in today’s Ahead of the Tape column.
Consumer spending grew at a 0.5% rate in January, faster than economists were expecting, but weak personal income data put a damper on the data as the savings rate dropped to its lowest level since 2008.
Savings rate drops to 3.3%, well off the high of 5.4% reached in last year’s second quarter, although it’s still above the 1.2% trough set during the boom. Whether the savings rate has peaked for this cycle is up for debate. Calculated Risk says an 8% savings rate could be reached sometime in the next few years.
But, as Kelly Evans pointed out in her Ahead of the Tape column this morning, some economists believe the stock market rebound has given consumers some optimism about the economic recovery and reason to increase spending, which could prevent the savings rate from going much higher.
Ultimately, all the talk about the American consumer undertaking a permanent shift to frugality may have been a bit premature.
Time will tell, but if history is a guide and the recovery continues, don’t discount the American consumer, Stephen Gandel writes at Time’s Curious Capitalist blog.
I think anyone who has lived in America for some time knows that we love to spend. So without some kind of government intervention — more incentives to save, some real financial reform that cuts back aggressive lending practices — it is unlikely that we will dramatically shift to a nation of savers. And this unfortunately is a bad thing. And that could be the best argument for some government action either in the form of more stimulus and job creation spending. Americas can only stop spending for so long. Savings seems to be a virtue again. But if incomes continue to stagnate or drop, Americans will again get used to spending more than they make. And if that happens, we can wave good-bye to another one of those Great Recession opportunities. Oh well.
Posted by Paul Vignaon July 20, 2009 Economy, Recession /
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I'm paying in cash this week Harry.
At the end of a long post arguing the housing market isn’t near a bottom, Barry Ritholtz offers this:
For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40-year credit binge, it’s long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, corporate America and their government.
That gets to something we’ve been thinking about for a while. There’s been a lot of talk about newly thrifty consumers. But when the dust completely settles, we wonder: will anything have really changed?
Income and spending were up in May, but read the data with a hint of skepticism.
Aid rushed out by Washington to revive the economy helped push personal income up at a rate of 1.4% compared to April. Spending increased 0.3%, while the saving rate rose to 6.9%, the highest in 15 years.
Of course when reading this data people must remember that the government’s “moved heaven and earth to keep the economy afloat,” James Picerno writes at The Capital Spectator.
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President Reagan’s former budget director David Stockman says Edward Snowden performed a heroic act, the Patriot Act should be repealed, and this whole spying-on-U.S.-citizens thing is a symptom of an out-of-control military-industrial complex. Click here to watch him go on YahooFinance. The author of “The Great Deformation: The Corruption of Capitalism in A […]
