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I want someone to accuse me of looking through the sluggish numbers just to find a silver lining!

The consensus thesis on the consumer is consistent with a fundamentally-weak economy: no job growth, declining real income, Bernanke-inspired price volatility, declining stock prices, falling house prices, sticky gasoline prices, and zero confidence.

Overall, the MACRO data out today on consumer trends is consistent with the factors listed above.  Yet, there are silver linings!  Well, maybe…

Today, the high frequency – ICSC chain store sales index – confirms the decelerating thesis, as the index fell 0.2% last week.  This is consistent with the painfully slow downward trend (the index is now down 6 of the last 8 weeks.)  On a year-over-year basis, growth dipped to 2.7%, the slowest pace in three weeks, though consistent with the trends of 1H11.  Is there a silver lining here?

Also bouncing along the bottom is the Richmond Fed survey, which contracted for the third consecutive month in September. The pace of decline moderated from August, as the composite index rose 4 points to -6.  Looking at the details, new and unfilled orders remained on downward trends but employment growth accelerated and input cost pressures eased.  The increase in employment month-over-month is the first silver lining in the overall sluggish environment

Lastly, after plunging 14 points in August, the Conference Board Confidence Index was virtually unchanged in September (rising only 0.2).  Last month saw a slight 0.7-point upward revision to the August print.  The improvement was led by better employment expectations, which is the second silver lining.

If the economy were to accelerate confidence should recover, but given the excessive debt burden domestically and in Europe, it’s unlikely that growth is going to accelerate.  Our 3Q GDP estimate is 1.1 to 1.4% year-over-year; the risk to the downside is that the low confidence results stay on a continued downward trajectory in sales trends, and causes further economic weakness. 

The third silver lining is not one from today’s data, but one that economists often cite as a reason to buy equities here: that corporate America is flush with cash.  That cash waiting in the wings coupled with pent-up demand could lead to a quick improvement in the jobs picture and an acceleration of growth.

Hope springs eternal, but is not an investment process!

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Howard Penney

Managing Director