“My Two Cents”
By Andy Sutton
7/7/2006
As the June economic data continue to flow, I have not been the only one who has noticed a crack in the facade of consumer impermeability. Much of the motivation for this column came from an article I read on MarketWatch entitled "Shopping Patterns Paint a Hazy June Picture". I have the article linked on my site www.my2centsonline.com if anyone is interested in reading it in full.
Lets talk a second about the numbers that were provided. The market puts a lot of stock in same store month over month numbers. Simplified, this means that they compare this month with last month. What the numbers DON'T tell you can hurt you if you put a lot of faith in them. These numbers are not adjusted for inflation; they are simply stated in dollar terms. The government says inflation for the same period was .5%. CPI figures are grossly understated. The consumers I talk with generally experience 3X the rate of inflation the government states. What this means is that inflation was responsible for a large portion of the actual dollar increases in sales. Consumers didn't necessarily buy that many more items, they just paid more dollars for the items they did buy. The numbers also don't count returns that consumers might make. The mainstream financial press tried to spin this lukewarm news by blaming the weather for a lack of shopping. Maybe there is some truth to this. Being somewhat of an optimist, I would like to view it as a signal that maybe, just maybe at least SOME folks are starting to feel the pinch and are adjusting their expenditures accordingly instead of running out and getting another loan.
The problem here lies in the proof that old habits are indeed hard to break. For the longest time, America was a pillar of thrift; we spent only what had been saved, with very few exceptions. Debt was reviled, and the only thing worse than debt was more debt. I've read some texts that have laid out the position that there has always been too much easy money in America, and maybe to some degree this is true, but I think everyone will agree that we (nor anyone else) have ever seen anything like the giveaway we've had over the past few years.
This money flowed easily from a stock market bubble in technology stocks to a bubble in real estate prices. But people love when the price of their house inflates 10 or 15% a year. With the upcoming retraction in housing prices, many of these folks will undoubtedly need SCUBA gear as their houses can no longer be sold to satisfy the debt owed on them, but rest easy; there will be more cheap money available. The Fed will make sure of it. That money will not be too quick to find its way to housing again, because housing will be out of favor. Some of it may trickle into stocks, but common sense and history tell us that it will find another, less desirable outlet: stuff. I would imagine that the only component left in the CPI at that point will be the dollar itself, because it will be the only thing actually falling in price.
I also found curious the nascent notion put forth by the statement in the article that there are now two Americas. One America that is beginning to realize how overleveraged it really is, and the other America that is still standing hard on the gas pedal, all good sense and logic be damned. The Era of Easy Money will certainly not be without its casualties; especially when it ends. I kind of like the idea of two Americas; it fits with a belief that I've had for some time now. When it comes time to square up, and cooler heads prevail and the liquidity spigot is finally turned off, there will undoubtedly be two kinds of people: Those who have, and those who wish they hadn't.
Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.
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