Thursday, April 30, 2009

What does the US consumer have to say about the March rally?

The BEA released March personal income data and it's interesting to compare the macro message coming out of that with what the markets have been reflecting.

Below, we have some interesting themes that we pulled from the data - many themes will not be new to regular readers of this blog but are merely being confirmed. Unless otherwise mentioned, all are on a rolling 6 month window, seasonally adjusted.

- manufacturing income continues to be the hardest hit segment, down 6.12%. We don't see this slowing down in the near term as real indicators for demand (i.e. non S&P numbers) are likely to temper any manufacturing pick up. The only bright spot for this sector is that the painful inventories adjustment has likely already been finished or is close to being finished. There may be further inventory adjustments but the bulk of the pain has already been flushed through the system.

- Trade/transportation/utilities are going down faster than the services sector as a whole (-2.34% vs. -1.77%). Given what's been going on with the macro trade picture and more micro factors (e.g. Baltic Dry), we're somewhat surprised this isn't actually lower. Unfortunately, there is little transparency into the categorization/methodology of these numbers so we have to take it at face value.

- the only increase in income unsurprisingly has been in the government sector, up 1.81%. The problem of course is that this is unsustainable. In the short term, this is likely to continue to increase as we see further roll-outs of government programs, and the existing ones are going to continue as usual.

- farm owners have gotten whacked to the tune of -8.87%. It seems that they are somewhat lagging the fall in commodities prices - we aren't quite sure of the exact reason but it's likely be a combination of how they were managing risk/futures and/or cash flows. This is probably the one segment that is unlikely to see too much more pain - unfortunately, this is a small proportion of the overall number.

- individual investors continue to see the damage as personal interest income and dividend income took a nosedive (-5.29% and -9.40% respectively). This of course is a double whammy in the face of increased job loss, lowered wages, lower home equity, and the equity decline in investment portfolios; the overall pain to individual net worth has been immense. Considering the continued poor outlook for interest and dividend income, this is unlikely to change. 

- government benefits are up huge; social benefits are up 6.28%, old age/disability/health insurance is up 5.67% and government unemployment insurance is up a whopping 38.18%. In real terms, the social benefits and old age/disability/health insurance are the biggest chunks, accounting for over 95% of the government outlays. The interesting part of the equation is that the outflows to pay for these programs (individual contributions for social insurance and current taxes) are down (-1.06% and -18.76% respectively). So in short, we are giving ourselves more more government benefits and paying less taxes - this is getting much less attention than the financial bailouts but is equally if not more worrying, given the slowness of the Feds to close down government largesse in response to macro conditions.

-the deleveraging of the US consumer is strongly, strongly under way. This is great news for the long term, terrible news for short term demand. Personal interest payments (non-mortgage) are down -9.54%, presumably on a combination of lower rates, personal bankruptcies and reduction of principal. Additionally, personal saving as a % of disposable income is up 38.10%. Again, this is great news in the long-term and is a strong signal for the USD and the US economy. Some of this no doubt is a fear-triggered response to the current economic and employment outlook but we believe that there is a permanent increase in savings hidden in the numbers. As a whole, this is a dagger for the macro demand picture and further calls into question the fundamentals of the recent requity rally.

In short, individual income continues to fall, the government is spending more, taking in less and growing debt for social programs and the drop in US consumer demand cannot be viewed as temporary. None of these are good or encouraging signs that we are near the bottom - the consumer has spoken, let's hope the market listens.
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