Consumption On

October 31, 2011
Weekly Market Commentary 10-31-11
Tim Phillips, CEO – Phillips and Company

You hear a lot about “risk on” and “risk off” by the media to describe the day-to-day short term volatility. For example, in the third quarter the S&P 500 fell 13.87%, clearly a “risk off” quarter. Then in October, as of Friday the 28th the S&P had increased by 13.74%, clearly a “risk on” month. At the end of all this, the S&P was actually up by 3.87% so far for the year.

The last four months have been a roller coaster ride but it’s important to maintain an intermediate and long term perspective in order to invest in the right areas. With that in mind, we took a deeper look at the advanced real GDP numbers. According to the BEA and based on the advanced estimate numbers, the US Economy increased by 2.5% in the third quarter. This number was in line with consensus and better than the first two quarters of the year.

Looking deeper into the GDP numbers, you can see that third quarter was clearly a “consumption on” quarter when compared to second quarter:

GDP Component Q3 2011 Q2 2011
Personal Consumption +2.4% +0.7%
Durable Goods +4.1% -5.3%
Nonresidential Fixed Investments +16.3% +10.3%
Equipment and Software +17.4% +6.2%

Not only was consumption up, but real inventories rose only $5.4 billion in the third quarter, the smallest gain in almost two years. At first glance, this would suggest thumbs up for our economy since consumption represents over 70% of our GDP.

consumers and businesses up spending

The issue is much of this growth in consumption came from consumers who aren’t growing their income. Personal income increased only 0.1% and personal consumption expenditures increased by 0.6%. This means spending grew faster than income and as a result the consumer appears to have dipped into their savings. In September, the personal savings rating was 3.6% down from 5.3% in June. Obviously, this is not sustainable.

savings rate decline during 2011

I would say this is better than another “inventory rebuild” quarter, but we are still not out of the woods until we see wage inflation. “Consumption on” is much better than “consumption off”, but we need to make sure it’s sustainable consumption.

If you have additional feedback we encourage you to get in touch with us via Twitter, Facebook, or Email me directly.

Tim Phillips, CEO – Phillips & Company

Research provided by:
Adam Gulledge, Associate – Phillips & Company

Hat tip to the Dismal Scientist for the spending graph