Dont Underestimate the U.S. Consumer? The Global Economy Is Strong?
These are two common refrains from mainstream economists who never foresaw a recession until it already had been declared by the NBER. Today we received some information that ought to give these mainstreamers pause for thought.
Wal-Mart, the largest retailer in the world, reported a lower-than-expected quarterly profit and cut its full-year earnings forecast. Chief Executive Lee Scott blamed Wal-Mart's disappointing performance on economic pressure around the world. Said Mr. Scott, "It is no secret that many customers are running out of money toward the end of the month." In order to chum-up sales, Wal-Mart is slashing prices on thousands of items, which, of course, will force its competitors to do the same.
Although pointy-headed economists continue to be positive on the U.S. consumer, investors have soured on this space, as evidenced by the chart below that shows the behavior of an index of U.S. retailing stocks. The index is down almost 14% from its mid-February highs. I seem to recall in late 2005 when a similar index of homebuilder stocks was falling that these same pointy-headed economists couldn't see the housing recession forming on the horizon.
Chart 1
Now, for the vaunted global growth story. Not 24 hours after the second-largest economy in the world, Japan, reported absolutely weak and weaker-than-expected second-quarter real GDP growth, the second largest economic region, the Eurozone, reported absolutely weak and weaker-than-expected second-quarter real GDP growth. Quarter-to-quarter annualized Eurozone real GDP growth slipped to 1.4% in the second quarter vs. 2.9% in the first. On a year-over-year basis, Eurozone real GDP growth edged down to 2.5% in the second quarter vs. 3.1% in the first. The unexpected weaker Eurozone growth calls into question two things - the policy rate increase by the ECB penciled in for September and the locomotive to pull the U.S. economy out of its funk.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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