Conclusion: As we illustrated during our 4Q 2010 Macro Themes call on October 5th, consumption trends are under pressure as government supports subside and taxes increase. The data released today shows this occurring in September and we expect this dynamic to continue in the fourth quarter and into 2011.
First, the ISM prints beats at 56.9 in October (the highest since May) from 54.4, that’s good news. The contradicting and not all completely good news is that the upside appears to be completely driven by exports having increased 6 points in October while inventories dropped in October. Not really a positive sign given that exports are such a small part of the economy and that the inventory builds accounted for 1.5% of the 2% GDP in 3Q10 (prior to the upcoming revisions).
What about the part of the economy that does matter, domestic consumption? A few bullet points:
- Both personal income and spending weakened in September. Personal income fell 0.1%: the first decline since last September.
- The decline in income was driven by a $25.5 billion reduction in emergency unemployment insurance benefits. Emergency benefits had boosted transfer income by $20.5 billion in August.
- Interest income (due to the Federal Reserve emergency interest rates fell 0.9% for the third straight month.
- Tax payments are up, driving disposable income down 0.2%.
- Real spending was up 0.1% driven by consumers diving into the savings rates which fell to 5.3% - matching its lowest level in over a year.
The Hedgeye consumer cannonball theme suggests that the next several quarters will be very taxing for the US consumer. The thesis is based on very difficult year-over-year comparisons as Uncle Sam runs out of crutches and can no longer prop up the consumer. A key takeaway from today’s data from the BEA is that transfer income is fading and taxes are on the rise.
While corporate profits are strong, the lack of confidence in the direction of the economy is holding back job growth as the unemployment rate will hit 10% before it will hit 9%. The data continues to bolster our conviction; the private sector cannot make up the slack in income and the economy is experiencing Jobless Stagflation.