Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Saturday, March 24, 2007

US Consumer Takes a Dive

It couldn't last forever. The US consumer couldn't just keep building up more and more debt on ever higher levels of spending. Eventually debt service had to overwhelm the US consumer and bring down spending. Perhaps March marks the beginning of the big reduction in US consumerism. Data from ShopperTrak shows an amazing year over year slowdown in the month of March:

On the one hand, this drop is too sharp to be believed. In all the economic data series that I've tracked, data doesn't do that. I expect there will be some sort of bounce back in the coming weeks heading into the Easter holiday. Still, the overall downtrend can't be ignored. The monthly data includes shopper traffic, which dropped off more rapidly than total sales from July through February:

The chart above fits with the premise that wealthier consumers have been spending at a high rate while people on the low end keep getting squeezed tighter to the point that they don't shop nearly as much. The Consumer Sentiment number tends to jump around a lot, but at least for now it is backing up the ShopperTrak data.

March will be a very interesting month for economic data as it will reflect the big credit tightening related to subprime lending. Most of the commentary about the subprime meltdown has talked about it like it is a disease that can spread, but I prefer to think of it as the proverbial canary in the coalmine. Subprime was just the weakest link and therefore the first to be wiped out as the great ponzi scheme begins to come crashing down.

We've also had a big slowdown in construction spending and manufacturing, and leading indicators for February look really bad. Here's something I posted over on the MarketTraders forum:

The leading indicators report is a lot worse than the headlines suggest. Here's the data:

These indicators were all down hard
-0.33 Initial Claims
-0.17 Consumer Expectations
-0.13 Vendor Performance
-0.07 Building Permits
-0.06 Interest Rate Spread

These indicators are just guesses (imputions):
0.02 New Orders for Consumer Goods
0.17 New Orders for Capital Goods
0.05 Money Supply
Last month's New Orders imputions got revised heavily downward, thus the change from +0.1 to -0.3. These types of guesses tend to be notoriously misleading when a trend is reversing.

Leaving only Stock Prices, Money Supply and Workweek reliably non-negative.
0.00 Average Workweek
0.06 Stock Prices

Follow the link above and take a look at the chart on the last page to see that leading indicators have been very good at forecasting recessions.

Here's that chart I mention:

In my mind most of the US economy and most US citizens have already been experiencing a significant recession. Underreporting inflation has helped the government show positive growth numbers, but only the financial sector has really been growing. Based on recent data it seems likely that the slowdown for the rest of us will soon be harsh enough that even the GDP data shows enough negative growth and the recession will be obvious, even to economists.


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