Wednesday, 14 October 2009
US consumers on the way back to their old ways?
Today US Retail Sales data gave the markets a positive surprise. It appears that the US consumer is indeed getting back to the old ways, spending when possible and not caring about tomorrow. Or what is going on?
Already late last year I stated that the recovery would be slow and protracted, as the US consumer would have to rebuild balance sheets after a long period of overspending and overborrowing. The positive side of this consolidation was that it would have a positive effect on the US trade deficit. For those of us who believe in some kind of celestial justice, it appeared fully justified that 7 fat years would be followed by 7 meagre years. Indeed, for a while it appeared as if everything would be on track for this scenario to unfold. Modern-day hubris and nemesis, so to speak.
The US trade deficit has indeed narrowed in spite of a record budget deficit. Private households have saved more, pushing the savings rate upwards. Economists were talking about a return to the 7 per cent savings quote within a short period of time. Just before the sub-prime crisis blew up, the private sector savings rate had shrunk below 1 percent and in periods in fact it was negative.
So where does this new rebound in Retail Sales come from. Well, it comes from a falling savings rate. In April of this year the savings rate stood at roughly 6 percent and everything looked fine (at least from this narrow perspective). Since then the savings hate has gone down below 3 per cent and it appears heading lower. At this pace the savings rate may return to the region of 1.5 per already this year, bringing one of the perennial American vices to the forefront: living on borrowed money. If the savings rate does indeed fall that far, the US trade account deficit will widen again. There will not be any improvement in the twin deficits which are ultimately at the root of the current market instability. So maybe we should begin to cry wolf again.
It might be wise, but that is at least not what the markets are thinking. Market participants are notorious for being able to focus only on news confirming their current beliefs. They are interested in seeing a quick return to growth and prosperity in order to justify the continuation of the current market rally. Hence they focus on the headline numbers (in this case the Retail Sales) and on the "surprise" they bring. Nothing could be more irrelevant to the market sentiment than some esoterical accounting entries that may influence us next year or later. It is entirely irrelevant that the effect will ultimately prove a further negative factor for the dollar's position in both medium and long term.
One could wonder what a fall in the Savings Rate would mean for the Obama administration. One could hope that some brave men and women would stand up and try to introduce tax structures designed to increase the Savings Rate – technically not really that difficult, indeed. Chances are that they will not. Obama will be up for re-election in 2012 and most of that year will likely be totally devoted to campaigning. This leaves us with two years to rebuild consumer confidence if Obama is to avoid the fate of being a one-term president. My guess is that consumers (i.e. voters) are easier to convince with the shopping cart in the mall than with some abstract element about the waning economic influence of the US of A. No matter how irresponsible it is, I believe that the political instincts will hail the "surprisingly good" Retails Sales data. The twin deficits will be for later....
Meanwhile, the stock market rally will continue. And maybe even deliver a blow-off into the New Year driven by all those who have been blindsided by the strength of the recovery.