Has the day of reckoning for the consumer begun? No, not quite. But the economic observers who’re warning that Joe Sixpack’s debts are set to cast disorder far and wide in the economy have another statistical release to dangle in the face of the optimists.
Retail sales in March advanced by a less-than-expected 0.3%, the Census Bureau reported yesterday. While the number disappointed most economists, and is middling at best, the more disturbing trend was documented in the retail sales report that excludes auto sales. Indeed, retail sales less motor vehicles inched up by a thin 0.1% last month, the lowest since April 2004, when sales ex-autos declined.
For those inclined to see the economic glass half full, the positive spin on all of this is that the sales report took it on the chin only because of higher energy costs. The rising price of gasoline and other fuels presumably convinced our hero Joe to stay home and read a book instead of venturing out to swipe his credit card one more time. “You are beginning to feel the pinch from higher interest rates and higher oil prices,” Louis Crandall, chief economist at Wrightson ICAP, tells Bloomberg New via the Chicago Tribune. “Spending growth isn’t going to fall dramatically, but it’s likely to slow.”
Assuming as much, the question then becomes: Does it matter if spending slows because of variable X vs. variable Y? Given the current state of affairs, the answer heavily depends on where you think energy costs are headed in the next six to 12 months.
In turn, that’s a cue for the optimists to argue that things may be looking up. Oil prices today briefly dipped below $50 a barrel for the first time since February. Yes, oil rallied afterwards, closing above $51 a barrel. But the writing’s on the wall, we’re told: the bull market in crude’s peaked and all will soon be well again in the retail business.
Perhaps, but if you believe some economists, the predicted slowdown in consumer spending has less to do with energy prices and more to do with self-inflicted debts. The dismal scientists at the Levy Economics Institute are front and center with such thinking. That’s not making them popular on Main Street, but it certainly makes for dramatic reading. In a recent report they warn: “A jump in personal bankruptcies and a sharp drop in consumer spending will be inevitable.”
Pessimism springs eternal in predicting Joe’s decline and fall. But no one’s ever gotten rich warning that he’s about to stumble. Then again, even Joe has limits. Where exactly those limits lie is debatable, although they may be closer than you think.
If Joe’s penchant for spending is headed for a fall, one can wonder how the Federal Reserve will react. Indeed, cheap money has been a staple in recent years in keeping the consumer machine rolling. Would the central bank be any less inclined to keep the Fed funds rate in negative real (inflation-adjusted) territory if the consumer shows signs of reluctance in buying another TV or SUV?
To judge by trading in the dollar and the benchmark 10-year Treasury Note today, we’re way off base for even asking if inflation risks could rise. The U.S. Dollar Index jumped to its highest since early February. If there are any fears that the Fed will sacrifice the greenback on the alter of boosting consumer spending, there were precious few traders in the forex pits today willing to put their money where their anxieties are.
But maybe there’s another explanation. A quick survey of the news wires, as always, provides an alternative perception, namely, the dollar’s rising for fundamental reasons as opposed to blind hope. Reports that the euro region’s economic growth looks as blasé as ever helped prop up the buck. “The growth story in the U.S. is alive and well,” Lara Rhame, a currency strategist at Credit Suisse First Boston tells Bloomberg News. “The dollar will be going stronger.”
But why stop there? Perhaps there’s a logic to a stronger dollar even if inflation were to accelerate. The fear of higher inflation and a Fed that reacts by tightening the monetary strings makes the greenback more attractive, say some analysts. But this notion assumes the Fed’s committed to fighting inflation at the expense of letting Joe’s shopping sprees of late fade into history. But the assumption could be over baked, which is to say that the old dual mandate of protecting the currency and maximizing national employment at the same time may come back to haunt the central bank once again.
Peter Schiff of Euro Pacific Capital is about as pessimistic as one can get on the speculation as to how the Fed will decide which is the bigger priority. The central bank, he opines, “can not bring down the inflation tree, without simultaneously bringing down the entire U.S. economy, which at present is comfortably resting in its extended branches.” Once forex traders see the light, he reckons, “bad news on inflation will once again be reacted to as being bad news for the dollar.”
Until and if that day of enlightenment arrives, it’s business as usual. The dollar’s up and the ten year’s yield is down. Hope springs eternal, but so does fear.