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Will The Real Consumer Please Stand Up

Today the Bureau of Economic Analysis reported that consumer spending grew at its fastest pace of the year at 0.6% in August, up from a 0.4% increase in July. According to the BEA, real consumer durable goods spending, which includes big-ticket items such as cars, refrigerators, and flat-screen televisions, jumped 2.8%, also the highest level this year. Bernard Baumohl of The Economic Outlook Group told the Financial Times (UK) earlier today that there is a “remarkable dichotomy taking shape in the economy. Month after month we have seen nothing but dismal news coming out of the housing sector… But this is not to say that household finances are under stress.” Baumohl added, “Today we get fresh evidence that people are still comfortable enough with the economic outlook to spend, and spend liberally.”

I’ll admit that I was surprised by today’s positive report. Recent consumer sentiment studies suggested a pullback in spending was likely. In Wednesday’s post I talked about how the Conference Board, a business membership and research group, announced just this week that U.S. consumer confidence had declined to its lowest level in nearly 2 years in September due to a weaker job market and uncertain business conditions. Even their August Consumer Confidence Index, with a cutoff of August 22, indicated that consumer sentiment was eroding significantly. It left me thinking, are consumers saying one thing and doing another?

I still believe that we’re going to see a significant slowdown in consumer spending. And it will be sooner rather than later. Peter Dunay, an investment strategist at Leeb Capital Management, told Forbes today that the rising costs of food and gasoline will divert capital away from other areas. Grain prices are surging, partly due to increased ethanol use and demand from emerging economies. Just yesterday U.S. wheat prices hit all-time highs, with some analysts fearing that a bubble might be in the making. Crude oil prices are hovering above the $80 mark. Accordingly, U.S. retail gasoline prices jumped 2.5 cents last week to $2.81 per gallon. Government reports show the national price for regular gasoline is up 43 cents from one year ago. Guy Caruso, who heads the Energy Information Administration (EIA), recently told Reuters that if crude oil prices stayed near their current high levels for the next few weeks consumers would pay more for gasoline. “We’ll start seeing a little bit of that (higher oil price) passed through” at the gasoline pump, Caruso said. As a result of these rising costs, Peter Dunay predicted that the additional money spent on food and gasoline will force consumers to draw from their savings (if any is left) for weekly bills. By the way, personal savings fell to $72.5 billion last month, compared with $89.5 billion in the previous month. Personal savings as a percentage of disposable income fell to 0.7% in August from 0.9% in July.

On Friday the latest Reuters/University of Michigan Survey of Consumers was released. The report echoed what the Conference Board had said earlier in the week. In addition, high food and fuel prices remained a major concern in September, especially for families with lower incomes, according to the survey. Richard Curtin, the survey director, said consumers are expected to become “more cautious spenders” in the year ahead. In a statement, Curtin added:

When asked to explain in their own words how their financial situation had recently changed, one-third of households with incomes below $50,000 said that higher prices had already devastated their family’s budget, and half of these families expected prices to increase faster than their incomes during the year ahead, reducing their living standards even more.

Consumer spending is the backbone of our economy. August’s report was positive despite negative consumer sentiment. A case of “actions speak louder than words,” perhaps? Maybe this time. Yet, my gut feeling tells me the words will soon turn into screams.