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Today's Market WrapUp 06.25.2008 Mon Tue Wed Thu Fri Puplava Archive
It sure looks that way as the stimulus checks have begun to filter into the economy with minimal effect. The month over month retail sales growth has picked up modestly recently, however the year over year growth rate continues its downward trend and is likely to continue south as the affect of the stimulus checks fade. Figure 1 Though the stimulus checks have resulted in a modest bounce in the monthly growth rate in retail sales, it has done absolutely nothing to stop the bleeding in consumer confidence. No matter how you try to spin it, the Conference Board’s consumer confidence numbers released yesterday were downright depressing. The present situation component fell to its lowest levels since the last recession while the expectations index fell to its lowest levels in more than 30 years. Despite readings like these, financial pundits are still holding on to the “goldilocks” economy denying any appearance of a recession. Figure 2 Consumer confidence will continue to deteriorate as long as the plunge in housing prices continues, which still shows no sign of stabilization as seen by the S&P/Case-Shiller National Home Price Index which plunged to a new low in April. As long as consumer confidence continues to erode, the growth rate in retail sales is likely to continue decelerating, so too the overall economy. Figure 3 Figure 4 “I’m in Debt up to My Eye Balls…Somebody Help Me”
Americans over the last several decades have leveraged up to maintain the their lifestyles. However, with greater leverage comes greater financial stress as investment banks of late have come to find out. Americans are buckling under the weight of a weakening economy when their debt levels have sky rocketed as has their financial obligations rate. Since 1980, total household debt outstanding has grown over 750%, the personal savings rate has fallen from 10.7% to 0.6%, and the household financial obligations rate has risen from 13.8% to 17.8%. Figure 5 Figure 6 In the 1990 recession, consumers had a savings rate of more than 7% and were able to use their savings and disposable personal income margin to help offset financial hardships. In the last recession consumers could tap into their home to make up for falling incomes and maintain, or expand for some, their lifestyles as their savings rate fell to roughly 2% and didn’t provide the safety margin that it did in the early 1990s. This time around, as the housing ATM has been out of service, a savings rate near 0%, consumers have few options left which is undoubtedly affecting the consumer psyche. More and more consumers are tapping into their 401(k)s for cash as a last option as the following article points out.
Americans have never been more unprepared for economic weakness and financial hardships than they are today, making them evermore dependent on big brother for handouts and bailouts, which is exactly the case today. Ignoring the affects of the 2005 hurricanes, more American households are collecting food stamps from the government to survive, and social benefit payments on the state and federal government levels continue to soar as we become less self sufficient and more reliant for governmental assistance. Figure 7 Figure 8 Figure 9 It is an economic fact that increasing consumption in the present leads to decreased consumption in the future through the loss of savings and compound interest. Instead of letting our money work for us, we are working for our money (consumption). Two changes need to made -- one by the consumer and one by the government; and that’s fiscal restraint. Americans need to cut back on consumption and materialism for the sake of their own future by saving for retirement by forgoing current wants. The savings rate must climb back to levels seen in decades past as social security will not cut it and may not be there at all come retirement time. The government as well needs to learn some fiscal restraint as runaway budget deficits can not go on forever without consequences (just look at the dollar). Unless changes are made to the American way of life this could be as good as it gets for quite some time. Chris Puplava Copyright © 2008 All rights reserved.
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