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We saw a really nice 200bp Retail Sales improvement for the month of August. While there's every reason to be excited about positive signs from the consumer, there's one very important thing to keep in mind...

Over much of the past year, our model suggests that 'discretionary' consumption has been running +4-5%. We define 'discretionary' as everything that is not needed to live day to day. We build up to a personal consumption number, and back out these 'essential' spending levels. Whatever is left is our discretionary spending. 

The interesting call-out is that we're entering a 5-month period where discretionary spending is likely to be down, marking a 500-600bp sequential erosion in spending rates.

The option, of course is for the consumer to take personal savings rate towards zero again -- though leverage levels and declining home prices are likely to nip that one pretty quickly.

We're not preaching gloom and doom here. But simply that it is pretty much useless to use hindsight in forecasting what the consumer will look like six months down the road.

Retail Sales v Consumption - 11 15 2011 9 32 04 AM

Retail Sales v Consumption - 11 15 2011 9 31 21 AM