Last graph (for now) on the divergence between the US equity market and the US economy, specifically the consumer spending component of the US economy.

This is generally the lowest correlation of the recent economic graphs with the US stock market as consumer spending growth, from the viewpoint of corporate management and Wall Street measures “sales growth” while the stock market is supposed to measure future real cash flow to the equity holders (stock owners) of the corporations. As mentioned in previous posts, many large US corporations receive a majority of their sales outside of the United States.  Times have changed, depending on the global businesses the corporation is in, domestic US sales are not nearly as important to future global corporate profits.

A plot of the year over year percentage change in both nominal (not adjusted for price changes) personal consumption expenditures (nominal PCE) and real (adjusted for price changes) personal consumption expenditures (real PCE) show private consumer spending growth is also in the recession danger zone (see previous posts on the current growth trend in US Industrial Production and US Durable Goods Orders compared with US equities) .

Consumer spending still makes up around 70% of US GDP. Unless the US government plans to do a lot of make work projects (fixing, re-building crumbling infrastructure, etc.), US GDP is going to struggle as long as the growth level of real (inflation adjusted) US consumer spending stays in the current 1.5% to 2.5% range that we’ve observed for a while now.

It makes the graph a bit busy (usually most people can’t follow more than three data series on a graph), but I also included the non seasonally adjusted US consumer price index (CPI-U) year over year % change data series (the brown line) to show what the US government says urban consumer inflation has been running at over time.

Remember, all these economic data points are the result of sample models.  Though very sophisticated, the economic models are not 100% accurate in determining the exact absolute level of growth (or contraction) going on in the economy at any one point in time. It’s the “trend” (the change or in calculus speak the first derivative) in the data series that you want to research and analyze over time.

From studying the historical data and also from being in tune with the current stock market “action”, valuation environment, risk taking environment, and also the general human market and underground corporate earnings sentiment (all of which one simply has to learn over time by making mistakes).   You then form your action plan to determine the best course of action as far as the stock market (capital markets really, bonds and currencies play a big part) and your investments are concerned.

Courtesy of the St. Louis Fed Economic Data: Personal Consumption Expenditure % Chg vs S&P 500 Index

US Personal Consumption Expenditure vs S&P 500 Index


The above graph shows clearly that anytime that nominal personal consumption expenditure year over year growth (the red line) has hit the current levels (3.1% year over year for October 2012) from a previous peak, the US economic usually is in  recession or is heading for recession in short order.  A simple observation from just looking at the previous three recessions for this particular data series.  Though not enough events or time to state that this level of nominal year over year PCE growth has any statistical significance, it’s obviously something to worry about.

The real (inflation adjusted) personal consumption expenditures year over year growth was 1.3% for October 2012 (the green line).  In my view, this is a truer measure of “economic activity” than the nominal measure as it attempts to measure “the dollar value of units of widgets”, adjusted for price changes, moving through the US consumer economy.  At the current year over year growth level, this real PCE growth data series says the US economy is in recession already.

Some FYI’s!

The year over year, non seasonally adjusted CPI-U data point for November 2012 was 1.8%.  There’s always debate about the absolute level of this consumer inflation data series.

PCE for November 2012 gets reported on December 21 2012.  the Wall Street consensus for month over month change in nominal PCE is +0.3%, after a month over month decline in nominal PCE in October.


Until next time.



Comments are closed.