9/9/2011
By Brian Sozzi, Research Analyst

The July consumer credit numbers were championed as fairly solid after they were released.  However, the largest decline in revolving credit in six months caught my attention for there was an improving trend from April to June of this year.  Whether the retrenchment was due to the assorted macro headlines of the month or not the fact is a trend was broken.  The reality is that the advance in revolving credit, coupled with a decline in the personal savings rate, supported pops in retail sales in July and likely (numbers are to be released next week; chain-store sales showed upside relative to consensus) August. 

Now what do we have going into the slower pre-holiday months of September and October?   A level of personal savings (around 5%) that throughout this recovery period has triggered the consumer rebuilding phase in order to spend during peak periods in the year, plus a pullback in revolving credit usage.  Two powerful drivers of consumption may be temporarily off the table.

If a short-term pullback in retail sales were to occur, it would not come as a surprise given recent historical patterns.  The consumer is displaying Tom & Jerry behavior, with it being Jerry Mouse and the world being Tom Cat.  When the macro coast is clear and savings flush, Jerry, aka the consumer, plays in the malls, discounters, and online stores.  We saw this from July 2010 to January 2011 as the appreciation in stock prices and the smell of a jobs market recovery (we created 347,000 jobs during the period) lent way to the wealth effect and improved sentiment. 

Hence, savings were tapped (not revolving credit) and that fed into retail sales.  On the flip side, when Tom Cat, aka the world, got tough in April through June of this year (inflation outbreak), Jerry Mouse scurried back into hiding; the savings rate went up and retail sales were soft.

Brian Sozzi
Wall Street Strategies

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