As we have been saying for quite some time the level of retail sales from the 3rd quarter, which was primarily due to utility and medical bills, most likely couldn’t be sustained after the massive drop in the personal savings rate. Today, we got confirmation that the wallets of consumers are becoming barren of that “green stuff” called money. More importantly, the rate of change over the last 6 months has fallen sharply even as the personal savings rate has declined. Any sharp rise in the savings rate at this point will throw retail sales into a very negative state which will, as discussed below, impact the economic growth rate in the U.S.
However, there has been an anomaly occurring as of late that has had me really perplexed – the high level of demand for automobiles. “For November advance retail sales rose much less than expected as a drop in receipts for food and beverages weighed against stronger sales of motor vehicles.”, the Commerce Department said on Tuesday. Think about that for just a moment – individuals are spending less on eating and drinking but spending more on automobiles? Really?
My friend Tyler Durden at Zero Hedge clued in on this anomaly; “In the past two months, everyone has been scratching their heads just how it is possible that the US manufacturing base continues to chug along at pre-recession levels even as the world all around America burns? Today, GM may have given the answer, courtesy of its monthly disclosure of car sales which at the top line is completely irrelevant as the funding for these purchases comes almost entirely from subprime loans handed out by the government to NINJAs. What is interesting is the little blurb in every monthly report discussing the amount of dealer inventory, a topic well-known to frequent readers of Zero Hedge which has discussed GM’s pervasive channel stuffing in the past, and which subsequently went quite mainstream. So how does November channel stuffing stack up? As the chart below shows, at 623,666 cars, it is an all time absolute record, and represents about 3.5 times the total GM vehicles sold in November!“
That tells us a lot about the real state of the automobile industry as well as the consumer. However, what is really disturbing is that this was exactly what we saw just prior to the last recession in 2007-2008. If we get back to the real world for a moment where people have a finite amount of funds each month with which to live on we see that total retail sales increased a very small 0.2% down from 0.6% in October and 1.1% in September. Considering, that November and December are supposed to be the months that put retailers “back in the black” for the year – the trend in the numbers is more than just a bit disturbing.
As stated earlier this is particularly concerning since consumer spending accounts for more than two-thirds of U.S. economic activity. The weakness in this report, which is the weakest of any month since June, suggest lower revisions to 4th quarter GDP estimates. This in turn keeps us squarely focused on our recessionary call of 2012 barring any stimulative intervention by the government. Furthermore, if the payroll tax cuts and other goodies from 2011 aren’t extended into 2012 that will trim an additional 2% off of GDP or, in other words, close to ZERO growth in 2012 if things just stay where they are today.
The trend in the personal savings rate is most disturbing. With oil prices hovering near $100 a barrel and food and energy consuming more than 20% of wages and salaries which have declined over the last couple of quarters; the outlook for continued strong consumption by consumers who have limited access to credit the lack of the ability to “save money” leaves consumers in a very vulnerable position. Any economic shock or rise in commodity costs will impact the consumers ability to spend much more rapidly given the lack of a “cushion”. Furthermore, weakness in consumer spending doesn’t bode well for aggregate final demand to spur businesses back onto a longer term expansion program. This all plays very much into our weak economic environment for 2012 and into 2013 and the impact on corporate profitability. If we are correct this puts most of the current analyst communities forecast of 1400 on the S&P 500 for 2012 very much in jeopardy.
“I will take overhyped market predictions for $300, Alex…”