Fed Minutes: Weak Consumer

I found some juicy tidbits from FOMC minutes:

Real personal consumption expenditures (PCE) edged down in June after holding steady in May and declining in April. Apart from a jump in motor vehicle purchases, which were boosted appreciably by the government’s “cash-for-clunkers” program, indicators of consumer spending in July were mixed. Most determinants of spending remained weak on balance. In particular, the weak labor market continued to place significant strains on household income, and
earlier declines in net worth were still holding back spending. However, household net worth received a boost from the rise in equity prices since their low in March. In addition, the July Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that the fraction of banks tightening standards and terms for consumer credit had diminished further. Moreover, measures of consumer sentiment, though they recently retraced a portion of their earlier gains, remained well above levels seen at the turn of the year.

And more
In the United States, overall PCE prices rose in June following little change in each of the previous three months. The increase largely reflected a sizable increase in gasoline prices, which appeared to have caught up with earlier increases in crude oil prices. The latest available survey data showed that gasoline prices flattened out, on net, in July. Excluding food and energy, PCE prices moved up moderately in June. For the second quarter as a whole, core inflation picked up from the pace in the first quarter, which had been revised down because of smaller increases in the imputed prices of nonmarket services. Median year-ahead inflation expectations in the Reuters/University of Michigan Survey of Consumers held relatively steady in July, as in recent months. Longer-term inflation expectations were about the same as the average over 2008. The producer price index for core intermediate materials turned up in June following a string of monthly declines that likely reflected the pass-through of the large declines in spot prices of commodities in the second half of last year. All measures of hourly compensation and wages suggested that labor costs decelerated markedly this year in response to the considerable deterioration in labor market conditions.

So it to parse through this a little bit, we have personal consumption being propped up from cash for clunkers. Well now that is over and we get our long awaited positive Q3 GDP print, what will continue to push that big 70% chunk of GDP higher? We know its not the labor market because that is still pretty ugly, as admited by the FED (Naked Capitalism had a great post on the labor market Unemployment: The Harder You Look, The Uglier It Appears http://tinyurl.com/mrhe65) “All measures of hourly compensation and wages suggested that labor costs decelerated markedly this year in response to the considerable deterioration in labor market conditions.” So wages are deflating and we have seen savings rates increase,(see Cut my pay … please! http://tinyurl.com/lxhaxb) so we know spending is not going to be coming from consumer’s pocketbooks. Well maybe they will borrow it? But banks are still tightening loan standards (maybe not at the rate at which they were, but tightening nonetheless) “In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey.Demand for loans continued to weaken across all major categories except for prime residential mortgages.” So I ask, where is this spending going to come from that is going to lead to a sustainable recovery. I know Washington is trying its hardest to prop up demand, but consumers are really only opening their pocket books when there is some fairly sizeable incentives (ie cash for clunkers $4500 rebate, $8000 first time homebuyers credit, etc.). The programs can only last so long and there can only be so many. From this perspective the run up in consumer stocks, especially luxury retailers looks completely misguided.


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