Thursday, March 15, 2007

Thou shalt not measure an economy by consumer spending alone

Most importantly, thou shalt not fear economic bullshit.

It's been all over the news that consumer spending rose only 0.1% in February. You'd think it was the end of the world.

"Tuesday's sluggish retail sales numbers may be the first ominous sign that the American consumers' remarkable propensity to keep spending is beginning to wane." - CNN Money

"Sales at the nation's retailers barely budged in February as severe winter weather kept already cautious shoppers away from the malls." - L.A. Times

Of course, liberal media outlets would just love a recession that they can blame on Republicans, particularly Bush's tax cuts.

"Retail sales in the U.S. rose less than forecast as the coldest February in more than a decade kept shoppers home and added to concerns the economic slowdown will deepen." - Bloomberg

That's strange, I thought we were supposed to be in the middle of global warming. In any case, did that many people really stay home because of the weather, and did anyone ever consider that if they did, perhaps they bought things online instead? The CIO of a $30 billion fund recently predicted that "Weakness in the equity markets of housing and autos will be offset by strength in consumer spending and exports this spring." Is he right? He could be wrong, but if he's right, I won't be surprised a bit. If anything, people could easily spend in spring what they had not spent in winter. And as we'll see later on, consumer spending isn't everything, because what people don't spend, they save.

Furthermore, what economic slowdown? GDP growth is not as robust as it has been, but it's still very moderate, with moderate inflation and historically low unemployment. That's an economic slowdown? France should be so lucky to have such a one.

"The Deloitte Research Leading Index of Consumer Spending fell this month, due to continued weakness in the housing market." - PR Newswire

If you examine the components of the index, you'll realize that it's meaningless. Tax burden and real wages are important, but factoring in only home prices is nonsensical when it's such a small portion of consumer spending. (Even then, money spent on housing is typically mistaken for consumer spending, when most of the time it's actually investment spending.) Now, the real stupidity is using unemployment claims, which is merely multiplying by 1. Unemployment benefits are an increase to someone's income but are also an equal decrease to another's, because of taxation. Finally, what does the final result mean? A drop in housing prices is related only very, very indirectly to consumer spending, yet one downturned housing market in the U.S. can make D&T's index fall. Why don't I create a index based on sunspot activity combined with my bamboo plant's growth and the cloud cover percentage at 2 p.m.? That would be as significant to the economy as John Kerry's nonsensical "misery index" of the 2004 presidential race.

"Sales at the nation's retailers barely budged in February as bad winter weather kept already cautious shoppers away from the malls. The Commerce Department's report, released Tuesday, raised fresh concerns that consumers could tighten the belt further, causing economic growth to slow even more than anticipated.... On Wall Street, stocks tumbled as the weak retail sales report and troubles with risky mortgages added to investors' fears about the country's economic health. The Dow Jones industrial average plunged 242.66 points, its second-biggest drop of the year." - Associated Press

Martin Crutsinger and Jeanine Aversa are so reliably prophets of economic doom that I can never seriously consider anything they put out. "Tumbled"? With the DJIA still over 12000, Tuesday's drop was nothing. One day is nothing. It can easily be erased with a day's rally, or a week's steady gains. The important thing about investing is to think long term, and not tear your hair out because stocks overall (because not all stocks were losers) took a hit one day.

"Analysts at ING Financial Markets say that US consumers have started to control their spending, which is likely to result in a slowdown in growth in 1H07." -

There's no problem here, none whatsoever, so long as the economy grows. While the first half of 2007 may experience slightly slower growth, such growth and quite possibly a little more will be spread out through the future. That's because whatever money today is not spent is therefore saved, which eventually becomes investment spending. Consumer spending is two-thirds of the U.S. economy, but don't let pseudo-economists and Chicken Little journalists fool you into forgetting this: people may spend less today, allowing businesses to borrow more money today, which creates more jobs in the future.

If I still earn $X per year, it doesn't matter if I spend 60% on consumption spending and save 40%, or spend 80%/20%. What matters is that total economic growth remains the same: if consumer spending falls because of a recession, that of course is bad, but we're not in a recession. GDP and personal income continue to grow. What also is important is that interest rates are left free to adjust so that economic participants can, on our own, find the optimal level of savings. We don't need a central bank that by definition skews our choices, most notably the incentives behind producing scarce goods and services.

So the lesson tonight: don't be so focused on only one economic indicator. I don't even look at inflation-adjusted GDP growth so much as unemployment, which right now at 4.5% indicates a strong job market. Mildly positive GDP growth, like in France and Germany, cannot overcome the bad news of high unemployment that is structural in nature.



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