Merk Market Outlook: Condition of the Consumer
The past two quarters have seen anemic 0.6% rates of growth and we expect that personal consumption for the advance Q1'08 growth report will advance 1.0%, which would be the weakest three months of personal consumption since the beginning of the 2001 recession.
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The primary catalyst behind the subpar performance has been the steep increase in headline costs. The price of domestically produced gasoline has increased 20.7% and the cost of food has risen 5.1% over the past year. This has eroded what little increase in wages that consumers have seen as the business cycle has come to an end.
The aggregate data has yet to pick up the passing through of prices by firms to the retail level, but the consumer is already beginning to see increased costs at restaurants, retail chains and in services. On an anecdotal basis, I have begun to observe the posting of "apology" letters from retailers, explaining to their customers why they have to raise prices and often their version of whom is to blame.
To date, the consumer has pulled back the reins a bit and even remained somewhat resilient around traditional holidays. Yet, we do think that the consumer is about to reach an infliction point. On a real basis consumption has slowed visibly. Real demand for durables declined -0.5% in March, while only increasing 0.2% for non-durables and services which are all well below cyclical levels. As Martin Feldstein, President of the National Bureau of Economic Research pointed out in the "afterglow" of the 0.6% rate of growth in the Q1'08 "that monthly data since January indicate that economic activity and overall growth have been declining since the beginning of 2008." We think that real spending in the upcoming personal consumption report for April will at best arrive flat with a very real risk of the second negative posting in the past five months.
Market Consensus Obtained Via Bloomberg
The next few months will provide a very difficult proving ground for both the consumer and the fiscal policies designed to influence the duration and intensity of the slide into recession. We do think that the net impact of the $110bln in rebates that started to go out on May 2 is that it will add 0.1% to personal disposable income. The combined effects of the robust demand from the external sector and the expected uptick in consumption due to the rebate checks should swing GDP in Q2'08 from a nasty negative number below -1.0% to a barely there 0.4%.
In our estimation the primary impact from the rebate checks will not substantially show up until Q3'08. However, we do not see much on the other side of the net impact from the stimulus that will provide a support for the consumer, thus setting the stage for a prolonged period of sub-trend growth in the economy.
Week Ahead In US Financial Markets
Tuesday 10:00 AM Consumer Confidence (May)
Consumer confidence looks to take another outsized hit, when the May report from the Conference Board is released. Due to the sharp jump in the price of gasoline during the monthly sampling period we anticipate that consumer confidence will decline to 60.3 for the month. Moreover, with the labor sector continuing to contract and headline prices further sapping the real personal disposable income of consumers, the headline may be poised for a greater decline to the downside.
Tuesday 10:00 AM New Home Sales (April)
Over the past several months a variety of data across the housing sector have provided a opportunities to declare the bottom in the now multiyear correction in the housing industry. We have assiduously avoided that temptation and continue to do so now. The fundamental basics of supply and demand will not be changed by carefully crafted claims of recovery at hand. The facts are that the inventory of new homes stand at 11.0 months and will not reach a stable equilibrium until 2009. We expect that prices will have to see a further 12-15% correction to facilitate that development. Our forecast implies that total sales will fall to 507K for the month of April amidst the continuing adjustment in both prices and rates.
Wednesday 8:30 AM Durable Goods Orders (April)
Wall Street's most volatile series should see a fourth straight month of declines in the headline series when we anticipate that new orders for durables will fall -1.0% and the core ex-transportation will decline -0.3% for the month. A weak month of orders for civilian aircraft and weak consumer demand should be the primary catalysts for another month of contraction.
Thursday 8:30 AM Jobless Claims (Week Ending May 24)
The initial claims series looks to be settling in at the top of its 350-370K range that it has moved of late. The four-week moving average resides at 365K, with no clear catalyst to send the weekly claims series higher on the horizon. However, the continuing claims series surged above the critical 3.0mln during the week ending April 19 and look to continue a steady march upward that should culminate in a 5.5% rate of unemployment by the end of 2008.
Thursday 8:30 AM GDP Q1'08 (Q1'08)
We expect that the correction in the inventories data will be more than offset by positive revisions in consumption, trade and construction. We expect that real consumption will have increased 1.0%, which should make it the weakest quarter on record since the begging of the 2001 recession. Our forecast of a 0.9% rate of growth should be tempered by the near 28.0% decline in residential construction.
Friday 8:30 AM Personal Income/Spending (April)
The major market-moving event, from our point of view, should be the release of the personal income and spending report for April. With headline costs continuing to soar the real adjusted rate of spending is clearly of paramount importance going forward to assess exactly how consumers are holding up under the strain of a weak labor market, rising prices and the continued decline in the value of real estate assets. Our forecast implies that the headline personal income and personal rate of spending will both advance 0.2%, with the real rate of spending arriving flat for the second time in the past three months.
Friday 8:30 AM PCE Deflator (April)
The Fed's preferred measure of inflation should see another month of modest increases with the core month over month rate expected to increase 0.1% and the year over year rising holding the line at 2.1%. It is our assessment that going forward that the sharp rise in headline costs will continue to bleed through to the core. With the peak costs associated with the summer driving season still ahead and the core year over year rate already standing above the Fed's implied comfort zone, there is little good news on the inflation front that even seasonal adjustments can fix.
Friday 10:00 AM Chicago PMI (May)
We expect that Chicago PMI to see a measured increase to 49.0 in what should be a fairly decent reflection of an economy in the process of completely stalling. The major risk for the month to our forecast is the rise in prices that could put quite a dent in the confidence of purchasing managers during the monthly survey. We suspect that the rise in the cost of basic inputs is further reducing already razor sharp profit margins, which will tend to offset any increase in new orders and production resulting from the external economy due to a weak dollar.
Friday 10:00 AM University of Michigan (May-Final)
After posting a recent low in consumer confidence we do not expect to any meaningful catalyst to cause a breakout of the gloom that has descended on the US consumer. With the cost of gas and food reducing the real income of consumers it would not be surprising to see the headline continue to fall in the coming months. For the final survey we expect the headline to increase one tick to 59.6. More importantly, the market will be closely observing both the one-year and five year ahead expectation of inflation. With the 1yr standing at 5.2% and the 5yr residing at 3.3% some fixed income traders are sensing a bubble building in the market, primarily in commodities. We do not concur. We think that the market is behind the curve and consumers, who have been quite accurate over the past year in sensing inflationary pressures building will prove prescient when all is said and done.