(The following is a reprint of an article from Bloomberg on consumer spending and inflation with  commentary from professional investor David Campbell inserted in (italic parenthesis) as a way of interpreting this article within the context of Hassle-free Cashflow Investing. Your blog comments are also greatly appreciated.)

consumer spending 

By Alex Kowalski – Jun 27, 2011

Consumer spending unexpectedly stagnated in May as employment prospects dimmed and rising inflation caused Americans to cut back.

(It is important to note that the title and general theme of this article is that consumer spending stagnated not declined.  This means that even though prices have gone up, it has not had an impact on the amount Americans are spending. Inflation is the effect of rising prices resulting from increased supply of currency and increased velocity of currency.  If the supply of currency has increased but the velocity – consumer spending – has stayed the same the result is inflation.   Some experts are hoping that inflation can be kept in check by a reduction of consumer spending – reduced velocity. A decline in consumer spending would  retard inflation in the short term, however while the supply of money can expand to infinity consumer spending can only retract so much. Eventually, the pent up demand for goods – consumer spending – will result in increased velocity which will compound the effects of inflation. )

Purchases were little changed, the weakest outcome since June 2010, after a revised 0.3 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News called for a 0.1 percent gain. Prices excluding food and energy rose more than forecast.

(As prices increases occur, the government must increase the supply of money to pay its own bills which creates a parabolic rate of inflationary price increases.  Very few economists have the hutzpa to publish forecasts showing inflation increasing at parabolic rates.  Most people see 0.3% gain per month and they think “no big deal”.  This is because most people are bad at math.  Using 0.3% per month COMPOUNDING rate of inflation an item costing one dollar today will cost $16.91 in 78.7 years – which is the average life expectancy in the US.  This rate of growth equates to 21.5% simple / non-compounding growth rate.  If Americans knew 0.3% monthly compounding inflation was really a 21.5% hidden TAX on their life, there would be rioting in the streets. In order to make money as an investor, you need to own inflation friendly assets.  Nominal gains from dollar denominated asset classes are almost always entirely eroded by inflation.  To beat inflation, you MUST own leveraged, income producing real estate. There is no other asset class whose equity and income will track with inflation).

Walgreen Co. (WAG) is among retailers that indicated 9.1 percent unemployment and higher gas and grocery bills have prompted shoppers to pare back purchases of less essential goods. Federal Reserve policy makers said the restraint on purchasing power may prove temporary as commodities prices start to decline, allowing the economy to pick up later this year.

(How can the Federal Reserve predict declining commodity prices? The Fed controls the money supply which is one half of the equation in pricing. Remembers inflation is supply x velocity.   The Fed controls supply but they don’t control velocity. If the Fed says commodity prices will decline, is the Fed saying they will remove money from circulation?  If the Fed removes money from circulation, wouldn’t that radically impair the economy? The government is in a catch 22 of having to continually expand the money supply or stop printing money which would result in a 3-10 year economic depression – which would be political suicide.  If the Fed believes purchasing power – velocity – will increase, that is an inflationary pressure in itself.)

“The quarter is going to be very slow,” said Christopher Low, the chief economist at FTN Financial in New York who correctly forecast household spending. “The biggest explanation for that is gas prices, so obviously the fact that oil has fallen quite a bit in the last couple of weeks is a really good thing. Relief just in time.”

Stocks rose as banks gained on new rules to safeguard the global financial system and technology shares rallied. The Standard & Poor’s 500 Index rose 0.9 percent to 1,280.1 at the 4 p.m. close in New York. Treasury securities fell, pushing the yield on the benchmark 10-year note up to 2.92 percent from 2.86 percent late on June 24.

(When treasuries or treasury bonds ‘fall’ it means the purchase price of the bond is discounted which pushes the yield up.  Investors demand a higher yield when they fear inflation will erode too much of their profits.  If the inflation rate is 0.3% per month compounding, that is 3.66% per year.  If the yield on treasuries is 2.92% and inflation is 3.66%, the effective yield on treasuries is NEGATIVE 0.74%.   You can make money TRADING treasuries and you can hold them as a LIQUIDITY alternative to cash, but only the financially illiterate actually purchase treasuries as INVESTMENTS.)

Survey Results

Estimates from 70 economists surveyed by Bloomberg ranged from declines of 0.3 percent to gains of 0.3 percent after a previously reported 0.4 percent gain the prior month.

The report showed incomes increased 0.3 percent for a second month. The gain was also less than forecast.

Wages and salaries increased 0.2 percent in May after climbing 0.4 percent a month earlier. Disposable incomes, or the money left over after taxes, were up 0.6 percent from a year earlier after adjusting for inflation, the smallest 12-month gain since May 2010.

Because incomes rose as spending stagnated, the savings rate rose to 5 percent from 4.9 percent in April.

Today’s report also showed inflation picked up from a year ago. The gauge tied to consumer spending patterns increased 2.5 percent from May 2010, following a 2.2 percent gain in the 12 months ended in April.

(As one would expect, it appears that wages are keeping pace with the cost of living.  Wages shouldn’t be going up during a very tough labor market, however because of the radical increase in the supply of currency the inflationary trend has found its way into wages as well.  As wages go up with inflation and the price of real estate stays the same it makes real estate relatively cheaper.   A one dollar an hour increase in wages results in an additional $12,500 of mortgage buying power for the typical consumer.   The article points out that the saving rate is increasing, which means there is a lot of cash sitting outside of circulation in our economy.  Increase savings rates slows inflation because it slows the velocity of money.   Pent up consumer demand for housing combined with increased borrowing power and savings rates means there is the potential for another real estate boom. One of the major obstacles preventing a real estate boom is widespread poor consumer credit is preventing financially qualified borrowers from getting loans.  If you hear about easing credit standards for real estate mortgages, you’ll know the next real estate boom is about to take off.  Smart investors will acquire a portfolio before that happens and then enjoy the price escalation which will result from the above factors.)

 

More Inflation

The Fed’s preferred price measure, the so-called core inflation reading that excludes food and fuel, rose 1.2 percent in May from a year earlier, compared with the 1.1 percent advance in April. It rose 0.3 percent in May from the prior month, the biggest one-month gain since October 2009.

Today’s report also showed that spending adjusted for inflation figures, which are used to calculate gross domestic product, dropped 0.1 percent for a second month. It was the first back-to-back decline in two years.

Economic growth slowed in the first quarter after surging energy costs strained consumer finances. Labor markets have begun to worsen this quarter, with payrolls growing by 54,000 workers in May, the fewest in eight months. Unemployment rose to 9.1 percent, the highest this year, the Labor Department showed June 3.

“Persistent high unemployment, a weak housing market, high fuel prices and inflation all put pressure on consumers,” Greg Wasson, president and chief executive officer of Walgreen, said on a June 21 earnings call. In response to the economic outlook, customers of the largest U.S. drugstore chain are shifting more spending to essential goods, he said.

Raising Prices

The Deerfield, Illinois-based company has been raising prices to combat more expensive input costs, including fuel, Chief Financial Officer Wade Miquelon said during the call.

In May, cars and light trucks sold at an 11.8 million annual rate, the slowest since September and down from a 13.1 million pace a month earlier, according to researcher Autodata Corp. Some of the drop in demand last month reflected a shortage of Japanese-made vehicles after the earthquake and tsunami in March disrupted supplies. With inventories running low, companies offered smaller discounts, deterring buyers.

Fed officials decided last week to keep the central bank’s balance sheet at a record to spur the slowing recovery after they complete a $600 billion bond purchase program by the end of this month.

“The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected,” Fed Chairman Ben S. Bernanke said at a press conference after a meeting of the Federal Open Market Committee on June 22. He said the slowdown is caused in part by “factors that are likely to be temporary,” including more expensive commodities as well as supply chain disruptions associated with Japan’s natural disaster.

(The actions of the Federal Reserve and the US Government encourage American’s to cut back spending which is a slowing of velocity.  When consumer spending (velocity) slows, the government has the ability to increase money supply – thus increasing government spending – without resulting in price increases.  Increased money supply and reduced velocity benefits the government because they have the opportunity to spend new money first when it has the most purchasing power.)

Gasoline prices have fallen about 11 percent through June 26 after reaching an almost three-year high of $3.99 on May 4, according to data from AAA, the nation’s largest auto group.

 

®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED. Here is a link to the original article as printed by Bloomberg: ” Consumer Spending in U.S. Unexpectedly Stagnated in May as Prices Climbed “
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