9/28/2012
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

After a market head fake yesterday that resulted from a Chinese cash injection, stocks continued to move in red territory today as rather discouraging data from consumer sentiment, Chicago manufacturing, and income-spending have continued to provide signs of slowing economic growth here at home.

One major disappointment today was that consumer sentiment landed worse than expected. The University of Michigan Consumer Sentiment September final result landed at 78.3, which was lower than the Street's expectation of 79.0 and lower than the initial estimate of 79.2; however, the result did represent the highest reading since May of this year and was a four point increase from the 74.3 level reached in the prior month. It is apparent that consumers' sentiment improved as they are feeling at bit wealthier given that stocks have continued to climb and that housing prices have improved. Perhaps, to a lesser extent, the fact that the jobs backdrop has not deteriorated may also be giving a momentary sigh of relief to consumers. Also surprising was that consumer's outlook suddenly reversed its negative trend. After three consecutive monthly declines, the expectations index increased to 73.5 from 65.1, landing a bit higher than the prior estimate of 73.4. Consumers currently see improved prospects for the national economy, but more interestingly, they see an improving jobs market. Quite ironically, consumers also expect very small wage gains and expect somewhat larger price increases during the year ahead, largely due to rising food prices. Consequently, half of all households anticipate declining living standards as their incomes fail to keep pace with inflation. It is likely that consumers' expectation of more jobs has more than offset their expectation of an overall lower standard of living, resulting in the higher expectations index. Moreover, given that consumers have been reducing their debt burden, they may be feeling less constrained and more able to spend, improving their shorter view of the future. While it is certainly encouraging to see consumers more confident, it is difficult to see this feeling continuing much longer as consumers will soon be reminded of the uncertainty in fiscal policies. We believe the uncertainty of changes in taxes and government spending is still a reality that consumers will soon be facing, and this will likely change consumers' perception.

Perhaps adding to the continuing perception of slowing U.S. economic growth, data from ISM-Chicago showed that the region was expanding at a slower rate than expected. September Chicago PMI dropped to 49.7 from the 53.0 level reached in the prior month, landing below the Street's consensus of 52.9. It should be noted that levels above 50 signify growth, so the result means that the region's manufacturing industry is now in contraction. We should note that last week we also saw a negative manufacturing result for manufacturing activity in the Philadelphia region, which shrank for a fifth straight month in September, and this past Monday the Federal Reserve Bank of Dallas showed that manufacturing in the region continued to decline this month, reinforcing signs the industry will offer less support to the U.S. economy. We expect this trend to continue in the near term. A broader economic measure of manufacturing comes out on Monday of next week, and this should shed more light on the degree of slowing growth in the U.S. economy.

Adding to the rather uninspiring bits of economic data today was that income rose below expectations and that real spending was driven by higher prices. Incomes rose 0.1 percent in August, below the Street's estimate of 0.2 percent, but more discouraging was that disposable income, or the money left over after taxes, dropped 0.3 percent after adjusting for inflation. Personal spending rose 0.5 percent, landing in line with economists' estimate, but the gain mainly reflected a 0.4 percent jump in prices, the biggest since March 2011, leaving real spending up just 0.1 percent. As result of incomes growing less than expenditure, the savings rate dropped to 3.7 percent from 4.1 percent in the prior month.

The result of disappointing consumer sentiment, Chicago PMI, and income-spending data was a down day for stocks as reflected by the Dow Jones Industrial Average, which ended the trading session in the red over 49 points, or 0.36 percent. As we have been observing all along, the economic fundamentals have not and are not supporting the current market levels; as such, it would not be a surprise to see this negative downtrend continuing in the short term.

Carlos Guillen
Wall Street Strategies