Nov 3, 2008
Real Personal Consumption Expenditures
I’ve always been a huge fan of In the book, Ellis gives us a method for analyzing the economy by using consumer spending as the primary indicator. It really simplifies the problem and as Ellis shows, seems to really have an impact on where our economy goes.
With that in mind, I wanted to re-examine what real personal consumption expenditures have been like over the last few years. To see if anything has fundamentally changed. When I started this blog in September of 2007 I believed that sub-prime would eventually affect consumer spending. Today we got a lot of news that seems to support the idea that consumers are indeed cutting back.
Here’s a chart of spending:
The chart seems to indicate that we’ve seen a sharp decline in spending and the last few times this has happened we’ve seen significant recessions. In addition, today a number of stores were released describing the problems with retailers and spending right now.
First at Circuit City:
Circuit City Stores Inc., the nation’s second-largest consumer-electronics chain, said it is closing and liquidating 155 stores and laying off thousands of employees as it struggles to stay afloat through the holiday selling season.
Citing a deteriorating economy, tightening credit terms by suppliers and reduced borrowing abilities, the Richmond, Va., retailer said it will close more than a fifth of its U.S. stores Tuesday and begin liquidation sales Wednesday.
The moves are designed to slash operating, marketing and payroll expenses while preserving cash needed to stay afloat. Circuit City was down to $92.5 million in cash and equivalents as of Aug. 31. If the effort falls short, industry analysts said, the only remaining options would be to close more stores or seek bankruptcy-court protection.
Then with General Motors, a cornerstone in American industry:
General Motors on Monday reported an incredible 45 percent decline in its sales from the month a year ago, and Chrysler said its sales were down 35 percent. The Ford Motor Company said it sold 30.2 percent fewer cars and trucks.
Toyota Motor said its sales were 23 percent lower, despite offering no-interest financing and large discounts on many models. Sales were down 33 percent at Nissan and 25.2 percent at Honda.
“If you adjust for population growth, this is probably the worst industry sales month in the post-World War II era,” Mark LaNeve, G.M.’s vice president for sales in North America, said in a statement.
Automakers Report Grim October Sales (NYTimes)
Even Whole Foods:
The purveyor of natural and organic foods said in August it would reduce planned store openings for its fiscal 2009, which began Sept. 29, and suspend its quarterly dividend. Chief Executive John Mackey said the environment was “the most challenging I have experienced in my 30 years in retail.”
Economic conditions since have worsened, making it even harder for the company, based in Austin, Texas, to attract customers to the gourmet foods that account for much of its profit, such as $15-a-pound sesame-crusted salmon and $9-a-pound mushroom-leek strudel.
Whole Foods declined to comment, citing a quiet period in advance of its earnings report. But amid the credit crunch and weaker consumer spending, investors have been selling off Whole Foods shares in anticipation of further bad news. The stock was up 15 cents a share in 4 p.m. Nasdaq composite trading Friday, but the shares are down 74% this year.
These stories could just be omens for an oncoming malaise in corporate earnings. So that means we may not have hit the bottom in stocks just yet. However, I think that we shouldn’t let these kinds of considerations explicitly dictate what we’ll invest in. It becomes too hard to time things and you begin trying to forecast not only company specific factors but where the entire economy is going – you can easily make mistakes.
I just like this to provide a little guidance, maybe to find some value investments with potential tailwinds. Trying to find the bottom might be a loser’s game – if you focus on picking stocks large margins of safety though you should be fine and outperform the market.