The Simple Truth About the U.S. Economy

Consumers need to spend to get the economy going—it’s that simple. In the U.S., consumer spending accounts for about two-thirds of gross domestic product (GDP) growth, so clearly, it’s critical. In comparison, consumer spending in China accounted for about 37.71% of GDP growth in 2011, according to the World Bank.

In China, the government is sitting on trillions of dollars in foreign reserves and cash, which the country can use to spend on its economy to boost its GDP growth.

America is sitting on nearly $1.7 trillion in national debt, which limits what the federal government can do, especially as the second deadline to extend the debt ceiling materializes on October 1. With little ability to act, this means President Obama must count on consumer spending.

There was another bad sign as the durable goods reading showed 0.1% growth in August, which was above the Briefing.com estimate of -1.5% and the -8.1% in July. But there is no way you can convince me that the number is encouraging. If September picks up, then maybe I will turn positive.

In my view, the reading continues to point to the hesitancy in spending on nonessential goods. This is the area that consumers will spend in if they feel confident in their financial situation. Based on what we have seen, I doubt consumer spending on stuff such as furniture, appliances, and other bigger-ticket items will pick up.

Retail sales excluding auto-motives edged up 0.1% in August, well below the Briefing.com estimate of 0.5% and the 0.6% growth in July.

We are also seeing some warnings from Wal-Mart Stores, Inc, WMT, along with department stores and specialty retailers.

The reality is that consumer spending is down. Until the jobs market strengthens—and this could take several years—it’s not going to be good for consumer spending and the retail sector. And unless consumers start spending, it’s going to be tough for the country to get out of its doldrums and escape from the current malaise.

As an investor, I would be hesitant to add retailers or cyclical goods companies at this time; instead, I’d wait until we see some of the sales numbers following Black Friday in late November before acting. What I’m expecting is the possibility of heavy discounting to move inventory, which will put a big amount of pressure on companies’ profit margins—and the results in the retail sector, of course.

This article The Simple Truth About the U.S. Economy originally published at Investment Contrarians