Don’t look to the data points on the consumer to support the S&P 500 being at a three year high. At best the numbers on the consumer this week point to sluggish underlying trends, but the reality is that government continues to prop up the overall consumer picture. This has been the case for some time, and may continue, but a potent cocktail of slowing growth and accelerating inflation – we call it Jobless Stagflation – is starting to muddle the thoughts of the Central Planners in Washington, D.C.
THE JOBS PICTURE IS PUNK - Yesterday, Initial claims rose by 25,000 to 429,000 for the week ending April 23. The increase was noticeably above consensus expectations and follows the previous week’s 12,000 decline. As our Financials team noted yesterday, reported claims are now at the same level they were in January 2010. The consensus that “the jobs picture is getting better” may need to be revised back to “the jobs picture is not getting any worse”. On the margin, this is a potentially bearish change in general expectations. That being said, a number of temporary factors may have contributed to the rise in initial claims, including auto plant shutdowns because of Japanese supply-chain disruptions and the shift in Easter. Initial claims have been above 400,000 for three consecutive weeks; the latest gain raised the four-week moving average from 399,250 to 408,500 (the highest since mid-February). In terms of employment, the recovery story is on ice for now.
INCOME FOM UNCLE SAM - Income growth accelerated to 0.5% before adjustment for inflation from 0.4% in February. The source of the improvement was the government as transfer payments grew far more rapidly than in recent months, led by increased unemployment compensation. This situation is temporary and without an improvement in core fundamentals, like employment, there will be an increasing case for a pullback in spending – particularly as the buck continues to burn.
SPENDING WHAT WE DON’T HAVE - Consumers clearly have the income to spend and as I said the questions of where the income is coming from and how long it can be sustained are front and centre for investors today. The High-Low society dominated 2010; consumer confidence by income is one chart that illustrates that idea vividly. A chart of the total enrollment in the Foodstamps program is another image that hits home when one considers the broader economic picture in America today. Overall, consumer spending moderated in March, despite a slight acceleration in income. Nominal spending rose 0.6%, down from 0.9% in February, while real spending growth slowed from 0.5% to 0.2%.
WITH LITTLE CONFIDENCE - While the headlines are showing an uptick in April consumer confidence the index gained back only 2.3 of the 10 points it dropped in March. The index is up 25 points from the November ‘08 bottom and 29 points below its January ’07 high. By contrast, the S&P 500 is a mere 4.6% off its close on 1/31/07. The economic drivers of consumer sentiment (housing, jobs, inflation and income) remain very mixed, which are consistent with the low level of confidence. The inflation of stock prices, a direct result of Ben Bernanke’s easy-money policy, remains the only significant positive influence on confidence at this juncture. Below, I have a chart indexing consumer confidence by income bracket from January 2010. I’m sure every investor could weave their own story into this chart but what I see is a sharp relative gain on the part of confidence among the $50k and above bracket following the announcement of QE2 and the stock market rip that followed. Positive jobs data, it could be argued, bolstered other cohorts at the end of 2010/early 2011. Even going back to our April Flowers/May Showers call, it is clear to see that the stock market was a huge driver of confidence at that point. I believe it remains so today and, with earnings strong, many are assuming that it’s different this time. The terrible trio of Accelerating Inflation, Slowing Growth, and Joblessness has not mattered to equity investors of late. In our view, it is reckless to “keep dancing while the music is playing” while earnings are peaking and, like in 2Q08, the macro is not being respected.