Don’t Panic Yet

We’ve seen another round of sour economic headlines. Unemployment is up to 6.5%, retail sales were down 2.8% in October and 4.1% year-over-year. General Motors is headed toward zero dollars per share. Even Walmart, although reporting greater than expected profit for the most recent quarter, warned that next quarter will likely come in below projections.

Is it time to panic? Let’s look at some data not making headlines.

Total employment is holding steady. There are 145 million Americans working in the legal economy. Average weekly earnings are up 1.35%. Of those who count as unemployed, just about 1 million voluntarily gave up jobs, 2.5 million re-entered the job market, and there were 750,000 new entries into the labor pool. Together, that’s over 4 million people who count as unemployed, but who did not lose a job.

Retail spending is down, but mostly on stuff that doesn’t wear out. Vehicles took the biggest hit. Furniture, electronics, and all the ephemeral goodies at the mall were down 1.4 to 2.8 percent, depending on subcategory. Grocery sales held steady, while bar and restaurant spending was up slightly. In the restaurant sector price point matters. McDonald’s reported a nice bump in sales, but my “on the street” survey suggests fancy nights out are down siginificantly.

Higher-priced meals are essentially entertainment. It’s the small luxuries people seem ot be cuttting back on. Everybody still has a driveway full of cars, just not this year’s model. Nobody is going hungry, they’re just not having wine and watching a band with their meal. Baubles, bangles, satin and velvet—fashion apparel—are among the most discretionary items.

The price of energy has plummeted. Gasoline is down more than 50% from the summer peak. The average motorist should find an extra hundred bucks left in his wallet at the end of November, compared to July.

People are choosing to spend less where they can. Prices for non-discretionary stuff have mostly stopped rising. Year-over-year, we’re still subject to the follow-on inflation caused by the oil spike. That will make for more sour headlines. Will the drop in housing costs, resulting from the collapse of the housing bubble, get the same attention?

In aggregate, the US labor force is earning more. In aggregate, US consumers are spending less. Where is the difference going? Savings.

Personal saving — [discretionary income] less personal outlays — was $140.3 billion in September, compared with $82.5 billion in August.

October savings should be even higher, as earning is steady and spending has “fallen off a cliff”.

I suggest the demand for the everyday luxuries available to our wealthy society has not gone away. Facing a drop in perceived wealth due to home and 401k values, and after a campaign-long barrage of negative economic stories, people are afraid. They’re not sure if the remaining two-thirds of their retirement will be wiped out. They might actually think the world is running out of oil—it isn’t— and don’t want to pick a vehicle using the wrong fuel.

The US is in a period of transition and adjustment. People are averse to change, more so when forced on them. Consumer uncertainty lowers consumer confidence, and lower consumer confidence leads to lower spending. But most of the country is still working. And earning. Eventually durable stuff will wear out and that spending will reach an equilibrium. Once perceived wealth in home value and retirement accounts stabilizes, folks will once again head to the malls.

It isn’t time to panic. Not yet. But a global disaster, or a combination of foolish government policies, could delay the new equilibrium I foresee. And prolonged instability feels like panic.