Wednesday, October 1, 2014
Inquirer Daily News

Summer of consumers' discontent

Economics in a nutshell: The consumer seems to be pulling back again and that does not bode well for growth.

Summer of consumers' discontent

FILE - In this Tuesday, Aug. 27, 2013, file photo, workers load large containers of nectarines for sorting at Eastern ProPak Farmers Cooperative in Glassboro, N.J. The Commerce Department reports on wholesale prices for August on Friday, Sept 27, 2013. (AP Photo/Mel Evans, file)
FILE - In this Tuesday, Aug. 27, 2013, file photo, workers load large containers of nectarines for sorting at Eastern ProPak Farmers Cooperative in Glassboro, N.J. The Commerce Department reports on wholesale prices for August on Friday, Sept 27, 2013. (AP Photo/Mel Evans, file)

INDICATOR: August Retail Sales/Producer Price Index

KEY DATA: Sales: +0.2%; Excluding Vehicles: +0.1%/PPI: +0.3%; Excluding Food and Energy: 0.0%

IN A NUTSHELL: "The consumer seems to be pulling back again and that does not bode well for growth."

WHAT IT MEANS: This appears to be the summer of consumers' discontent. While people are out there buying vehicles and homes, they are doing so by taking out loans. If they have to buy it with cash or credit cards, forget it. Revolving credit was down in June and July and we will probably see that again in August as retail sales were pretty soft. Purchases of big-ticket items bounced back in August as sales of vehicles, furniture, electronics and appliances rose solidly. People did go out to eat as well and eCommerce was strong. On the other hand, sales of general merchandise, clothing, building supplies and sporting goods were down.

One thing that has helped sustain spending is tame inflation. Low price increases are likely to continue as wholesale prices rose moderately but were flat when the volatile food and energy components were removed. That comes on top of weak import prices. In addition, the pipeline looks largely empty as intermediate prices were flat and crude costs declined. Of course, real people do have to buy those minor necessities such as food and gasoline and electricity, and when those costs go up, spending on other products is likely to fall. That happens when incomes are flat.

MARKETS AND FED POLICY IMPLICATIONS: Retail sales were disappointing and the bad news may continue as the Thompson Reuters/University of Michigan's mid-month reading of consumer sentiment was down sharply. It is unlikely that households who are becoming more cautious opening their wallets wide. Thus, it is becoming harder to forecast decent growth for the third quarter despite the good housing and vehicle data. Whether the prospects of continued lackluster growth will affect the FOMC's decision next week is doubtful. As I noted yesterday, when it comes to current Fed policy, it is nothing about the economy. If it were, there would be little reason to start tapering. Indeed, if you think about it, with consumer spending mediocre, housing applications down sharply pointing to a deceleration in that sector, job gains disappointing so income growth is likely to be soft and confidence faltering, you would assume the Fed would be looking toward greater not lesser accommodation. As I have said many times, I just don't get it. But I am not on the Fed so all I can do is point out the potential inconsistency between economic activity and Fed policy. As for the markets, Syria is moving to the back burner and that is helpful even as the economic data continue to disappoint. In other words, who knows what goes through the minds of investors these days.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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