The Inexplicable American Consumer Strikes Again
Thursday, October 27, 2011 at 3:59PM
Wolf Richter in Consumer, Economy, Federal Reserve, Inflation & Devaluation, Jobs, Shopping, confidence, consumer spending, health care, mall

The recent consumer confidence indices, after a pickup in the spring, have collapsed to levels not seen in years and in some cases in decades. Yet the inexplicable American consumer, the toughest and most indefatigable creature out there that no one has yet been able to beat down, struck again. Consumer spending increased at an annual rate of 2.4% during the third quarter, though the mood, as measured by the confidence indices, has become outright morose.

The Bloomberg Consumer Comfort Index dropped to -51.1. By comparison, it averaged -46.2 so far in 2011, -45.7 in 2010, and -47.9 in 2009. The shocker was this number: 95% of the people surveyed had a negative opinion about the economy, the worst reading since April 2009, and just 1% away from the worst reading since the index began in 1985.

The Conference Board's Consumer Confidence Index plummeted to 39.8, the lowest level since March 2009, at the trough of the great recession. The Present Situation Index fell to 26.3 from 33.3, its sixth consecutive monthly decline.

"Consumer confidence is now back to levels last seen during the 2008-2009 recession ... as pessimism about the current economic environment continues to grow," said Lynn Franco, Director of The Conference Board Consumer Research Center, on October 25 when the Confidence Board released its numbers.

Mid October, it was the Thomson Reuters/University of Michigan's preliminary index that headed south. Its sub-index for consumer expectations six months from now, which gauges future consumer spending, dropped to 47, the lowest since May 1980.

The reasons are obvious. The Fed is winning its 12-year war on real wages. Its mechanism: create inflation that exceeds nominal wage increases. The numbers are ugly. According to today's GDP report, real disposable personal income—income adjusted for inflation and taxes—decreased by 1.7% in the third quarter (BEA). Since their peak in 1999, real wages have dropped 9%. Median household income—a function of wages and unemployment—has fallen 9.8% between December 2007 and June 2011 (Sentier Research). For many people, the situation is even worse due to the skyrocketing costs of healthcare and higher education, which are eating up an ever greater part of the declining family budget (for more: A Dysfunctional System That Bankrupts A Generation). And Unemployment remains a fiasco by any measure: U-6, the broadest measure the Bureau of Labor Statistics offers, and the one that most closely resembles reality, hovers at 16.5%.

And yet the inexplicable American consumer went ... to the mall. And to the doctor—of the $10.8 trillion in consumer spending (seasonally adjusted annual rate), $1.76 trillion went to healthcare, about half of which was paid for by government. And healthcare has been on a tear, up 6% over the same period last year.

Back to the mall. The worse things get, it seems, the more consumers pull out their credit cards—confirmed by the savings rate which dropped to 4.1% from 5.1% in the second quarter. The effect of shopping as a drug against the funk of daily life has been well established, though its impact on the mood of the shopper has proven to be ephemeral. Now the drug has worn off, and as the confidence indices show, consumers feel worse than before, worse than in years. That can only mean that they will return to the mall to shop till they drop.

Or they will cave. Though the miraculous powers of the inexplicable American consumer should never be underestimated, some uncomfortable indicators have been accumulating. Among them, my favorite:

“It is hard to imagine a very robust holiday season compared to last year,” Blake Jorgensen, Chief Financial Officer of Levi Strauss warned earlier in October. He was griping that his price increases of $5 to $15 per pair of jeans didn't sit well with consumers. (Duh, did you think the American consumer is stupid? Disclosure: the only jeans I've ever bought were Levi's, but I'm going to wear mine down to rags before I pay fifty bucks for a new pair. Hint, Mr. Jorgensen: I'd be willing to buy two for the price of one right now, or none for a couple of years. Do the math and think about it.)

On the other end of the big American mall, during bailout mania, the Fed handed out trillions of dollars in secret. But now... The GAO Audit of the Fed Doesn't Quite Call It 'Corruption'

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