Home > Economy
The Biggest Financial Shoe Drops: Consumer Spending
It’s no secret that consumer spending is to the U.S. economy what fat is to foie gras. Which is to say, it accounts for nearly 70% of Gross Domestic Product.
So, given the amount of economic turmoil the U.S. faces today, the government will adopt a "Saving Private Ryan" policy regarding consumer spending: Keep Alive and Well at All Costs. (See: Politicians bailout the floundering mortgage giants Fannie Mae and Freddie Mac, and this week's Housing bill.)
Their great fear is that the rescue scheme will come too late. According to a July 31 news story, once the tax refunds and stimulus checks stop, “Consumer spending will likely hit an ‘air pocket’ by the end of the year.” (MSNBC)
News Flash: It already has. The $100 billion (and counting) in tax rebate checks were about as “stimulating” as a sleeping pill, as the following news item makes plain: “Recent research reveals that fully two-thirds of consumers said they had not planned to spend their stimulus checks and rather intended to use the cash to pay off debt or put the money into savings… Consumers continue to make cutting back a priority.” (AP)
That’s just the beginning. In the brand-new August 2008 Elliott Wave Financial Forecast, our analysts identify the top TWO signs that a far-reaching shift to thrift is in full effect. First, a compelling close-up of the U.S. Savings Rate over the past four decades shows that the 30-year downtrend ended at a negative 2.3% rate in August 2005. In May 2008, the savings rate skyrocketed to 5%.
And, a potentially larger crack in consumer spending is the drop in Money Supply. The August Elliott Wave Financial Forecast presents the following chart of the 13-week Rate of Change for M2 and total bank credit plus commercial paper since 2004.
The drop-off in consumer spending will likely be all over the Internet and cable wire in coming months. But, as Elliott Wave International President Bob Prechter likes to say, “It’s more useful to be ahead of the topics that will mesmerize people later.”
Case in point: the newfound frugality among U.S. consumers and businesses is exactly what Bob anticipated in his 2002/2004 book Conquer the Crash:
“When social mood changes from optimism to pessimism, creditors, debtors, producers, and consumers will changes their primary orientation from expansion to conservation. As consumers become more conservative, they save more and spend less.”
And -- “Total credit will contract, so bank deposits will contract, so the supply of money will contract, all with the same degree of leverage with which they were initially expanded.”
As the August 2008 Elliott Wave Financial Forecast points out: The major economic, stock market, and social events now depicted in the media were all outlined long ago in Conquer the Crash, Elliott Wave Financial Forecast, and the Elliott Wave Theorist. Get the complete package today via a risk-free subscription.