10/28/2011
By David Urani, Research Analyst

One of the most intriguing trends to watch in the last couple of months has been the behavior of consumers. In particular, as we saw today from the 3Q GDP report, is the fact that the consumer really did the heavy lifting for the U.S. economy during the third quarter. Personal consumption expenditures were up 2.4%, and represented 1.7% of the 2.5% total GDP growth. So, we consumers deserve to pat ourselves on the back. However, that doesn't tell the whole story, because consumers' feelings have not told the same tale.

Two weeks ago, I pointed out this trend in a website article (click here for the article), showing how consumer spending accelerated as confidence plunged, based on retail sales data and the University of Michigan consumer sentiment index. Since then, more data has come in to confirm those points. That data includes this morning's GDP reading (specifically PCE) and the Conference Board's consumer confidence index.

Below I have posted charts of both PCE vs. Conference Board's confidence index, and retail sales vs. the University of Michigan's consumer index. As you can see, the data sets confirm one another, so if there was any doubt before about the divergence of spending and confidence, here is the evidence.

Whatever the case, consumer spending and consumer sentiment have been out of sync for more than a year now, after being relatively well correlated before that. Given the long term nature of the trend so far, we don't necessarily think spending has to drop, even though confidence is down. For our purposes, we can live with that, because the market is generally going to be driven more by the actual spending than by how consumer's feel.

Yet, the BEA personal income and spending report suggests that all the consumer spending may be coming at a price. According to the report, personal spending came in higher than expected, but the personal savings rate (incomes minus spending) fell to its lowest level since December 2007. Americans were saving just 3.6% of what they earned. It looks like consumers almost had no choice but to dip further into savings in order to pay for necessities like shelter, food and gas. In fact, September personal spending was flat excluding food and energy. In that sense we have to begin to wonder if the consumer will go into belt tightening mode to adjust for declining savings.

David Urani
Wall Street Strategies