- Reports Monday highlighted steady consumer spending.
- In the US, consumer spending and personal income rose month-over-month in May.
- Overall strong fundamentals and steady consumer spending further support the likelihood of continued economic recovery.
- Markets may be registering near-term jitters for now—the hallmarks of a classic bull market correction.
It appears, once again, reports of the death of US consumers have been greatly exaggerated—on Monday it was reported that consumer spending remains surprisingly steady. Surprising because, from the beginning of the recession to just recently, folks thought consumers wouldn't spend again—only to be proven wrong. Consumer spending just isn't as variable as most believe.
In the US, for example, consumer spending beat expectations, rising 0.2% month-over-month (m/m) in May. Now, some complain consumer spending isn't rising as fast as they'd like—but then again, it never fell much—as is typical in recessions. In fact, in the last recession, consumer spending increased as a percent of GDP. Sure, it fell a bit—shrinking -1.7% from GDP peak to trough—but not as much as other more volatile components like exports and business spending, which have bounced back big since US GDP resumed growth in Q3 2009.
Discretionary spending, the most volatile (though smallest) component of consumer spending, remains notably strong. While folks never stopped buying cheap necessities like toothpaste and toilet paper, spending is rebounding on large-ticket items now. Added to overall strong fundamentals in the US—for example, Q1 GDP growth was revised down but still remained strong, and a rise in personal income—the US economic picture looks solid, and continued recovery seems that much more likely. (For a refresher, see our past cover stories here and here—each week brings a litany of new, surprisingly strong fundamentals.) And globally, the story is much the same, be it in Asia or elsewhere. (Though maybe not so much in tiny Greece, even the larger EU economies are generally fine.)
So why did the stock market shrug off the good news today? Simple. It's the very nature of corrections—everything feels bad and hopeless. Good news is twisted to sound bad or is completely overlooked. This market correction largely started on a panic over debt in small nations and fear of contagion. But those "weak" nations continue to raise cash from investors at rather unremarkable interest rates—thanks to a whopper of a guaranteed bailout—and there's zero evidence of contagion. As for the ongoing rumbling of a "double-dip" courtesy of PIIGS debt woes (which are relatively small and almost wholly contained)—true double-dip recessions are exceedingly rare and tough to get when overall the world is fundamentally strong. For now, markets are registering near-term jitters. Yet, the many widely feared disasters keep failing to arrive.