Consumer Sentiment and Spending

Everyone agrees the US economy is all about consumer spending - personal consumption expenditures (PCE) make up 72% of GDP. Naturally, there is a tight relationship between how confident people feel and their spending.

Here is a chart that compares the percentage change in real, inflation adjusted PCE (red line) with the consumer sentiment index published monthly by the University of Michigan (blue line).

At 62.6, the sentiment index has now reached the lowest level in 26 years, portending further declines in spending. Headline data on sales may be muddled by sharply higher food and fuel prices and the ongoing racket of manipulating official CPI inflation*, but you can't hide the "real" reality manifesting itself on the ground.

• Starbucks just slashed its outlook. This icon of discretionary consumer spending is seeing lattes-to-go go down the drain. "It's amazing how fast business has derailed", said RBC Capital Markets analyst Larry Miller.
• People are cutting back on laser eye surgery. Elective LASIK surgery can cost thousands of dollars per eye - the other end of the discretionary spectrum from a cup of coffee. But the principle is the same: unnecessary spending is being curtailed. A 17% drop in procedures is forecast for 2008.

As we come up to stimulus time - those $600 checks borrowed abroad on behalf of the American people by the Bush administration - I expect most of the money spent will go towards basic, pressing necessities: food, gas and debt payments.

And since I mentioned gasoline, consumption has stopped growing (see chart below) and for the year to April 18 it is down 1.12% from last year.

Data: EIA

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(*) Everyone should read this damning article by Kevin Phillips in the latest issue of Harper's Magazine: Numbers Racket. Kevin used to be a mainstream Republican political strategist. I am increasingly getting the feeling that economic reality is getting swept under the carpet, an uncomfortable parallel to the late Soviet Union's "official" reality until it imploded all at once.