Perhaps our second favourite real-time read on the economy (second to Initial Claims for Unemployment Insurance) is Real Retail Sales.
Spurred on by Joe Weisenthal’s article on the retail sales, we augmented our usual view into retail sales by creating a graph examining the inflation-adjusted number of dollars per month spent per non-institutional population.
Let’s take a look:
This metric clearly has peaked many months before both the business cycle and the S&P 500. It clearly demarcates when the investment turns into speculation.
It is perhaps less useful in determining the beginning of a new up-swing, as changes in the Marginal Propensity To Invest seems to lead the economy to recovery whilst the weaker hands are still saving.
It makes sense, of course. This is a direct view into Marginal Propensity To Consume. This is the advanced view of end-demand that reflects economic reality at the margin of perhaps the most important force in economics.
The question is: what does it say now? Although it is stuttering, that is neither inconsistent with previous rallies, nor does it indicate nearly the kind of weakness that it accurately forecast months or years in advance prior to the past two recessions.
It is presently unlikely that the USA will experience another demand shortfall-led recession. It is possible that the investment or lending dry up, which could lead to a further demand short-fall, but the data does not yet suggest this yet either.
Conversely, the levels are rather depressed as they are (first hit in 1998, then again in 2001), which is indicative that there is very little fat to trim in US consumer spending.
So: in the mean-time, we are cautiously optimistic that valuations will improve into the 2nd half of 2011.
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