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Sunday, July 16, 2006

0.1% Decline is Good News & 5.9% Increase is Bad News!

From CrossProfit

Consumer spending increased 5.9% YOY. This is ahead of inflation and is also ahead of GDP growth. On the one hand this means that businesses are still profitable and growing. On the other hand it also shows that consumer debt must be increasing as new jobs and wage increases do not add up to 5.9% YOY.

Consumer spending declined 0.1% last month. Great!

The stock market is concerned with this coupled with the U.S. unabated appetite for oil. The real problem is that no matter how you look at the figures the U.S. economy is in a catch 22 situation.

If consumers start spending less then business earn less then hire less then there are less consumers spending less and so on and so forth. The result is a recession.

The flip side is that if consumers start spending more then business start earning more but if they hoard the cash or even distribute the profits to the wealthy, eventually the consumer goes bust and then you don’t have a recession instead you have a depression.

If businesses increase wages and reduce their profits then investors will look elsewhere and there will be no new job creation and you end up with stagnation.

If businesses increase wages and then raise prices to refill the company’s coffers then you end up with inflation.

The real killer is if at the same time that wages increase the currency devalues or raw materials and/or finished goods increase and interest rates and unemployment explode and you end up with stagflation.

Recession, depression, stagnation, inflation and stagflation… matter how you cut it the current situation doesn’t look good. There is however a way out. The objective is to maintain current levels of business activity as a whole perhaps even manage a slight increase in line with inflation and reduce consumer debt.

The first dose of reality is to understand that no economy can maintain a 66% consumption rate. The ideal situation is that production equals consumption. If you don’t produce then you should not consume. The notion that supply side economics can spur economic growth indefinitely is bogus. Eventually you accumulate so much debt that everything goes kaput. Supply side economics works great for getting an economy out of a recession. Once achieved, the emphasis should be on production of goods consumed.

They don’t have to be the exact goods. The equivalent value is fine.

This is exactly the juncture where the U.S. economy is at now. Increase production to match consumption. Of course this is easier said than done. In order to achieve this objective Americans have to work hand in hand with Big Business. We’re not referring to protectionism which always backfires in the long run. We are pointing to the fact that as industry figures out how and implements production increases for both the domestic and export markets, the American consumer can assist by shifting their discretionary spending habits. Any bottom line reduction in consumer spending has to be replaced with exports in order to maintain the same level of economic activity. Also industry has to want to invest in America.

Certain items deemed nondiscretionary have to change as well. There have been numerous articles written how Americans waste energy. This too has to stop. The taboo of driving a gas guzzling SUV around the corner to buy milk has to become synonymous with your next door neighbor loosing their job. The problem seems to be that Americans just don’t care anymore. When meeting the neighbor it’s ‘oh how awful’… then go home shut the door and say it’s not going to happen to me, why worry. On second thought, who really cares about the SUV…in fact as gas prices go up it becomes more of a status symbol! It is almost like why buy a cup of coffee for a buck when you can spend five at Starbucks!

It looks like things will have to get a lot worse before they get better.

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