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Ridiculous Headlines Say Surging Consumer Spending To Drive US Economic Growth

Real Personal Spending and Real Retail Sales - Click to enlarge

The BEA reported today that Personal Income rose and Consumer spending rose in July. The headline numbers were +0.4% and +0.3% respectively. These are seasonally adjusted month to month % gains. The numbers were also revised up for May and June. Let’s party!

The Wall Street Journal headlined:

U.S. Consumer Spending Rose in July

Domestic consumption could continue to drive economic growth over the second half

WSJ reporters Anna Louie Sussman and Ben Leubsdorf clownishly regurgitated the Establishment line.

Consumer spending rose for the fourth straight month in July, a sign that domestic consumption could continue to drive U.S. economic growth over the second half of the year.

Four consecutive months of solid spending pointed to continued confidence on the part of the consumer, supported by steady job gains and low interest rates and gasoline prices.

The BEA estimates the data on the basis of throwing seasonally adjusted component data into a stewpot, where it mixes and cooks the numbers. The resulting stew is impossible to analyze on a not seasonally adjusted basis, as I like to do.

For most economic data, the actual, not seasonally adjusted data trend is easily visible with a few simple techniques of technical analysis. These include trendlines connecting the highs and the lows of the monthly data. These techniques enable us to easily see trend changes as they happen. We can also use the year to year rate of change as a basis for showing whether the trend is stable, accelerating, or decelerating.

Economists never use these simple techniques. Instead they rely on “sophisticated” econometric modeling of the numbers, like seasonal adjustment. The resulting forecasts are virtually always wrong at major inflection points. Economists never see major turns until months or even years after the fact. Perhaps their models are wrong, and they should stop manipulating data in ways that invariably leads them astray. Financial journalists then slavishly report their opinions, and the investing public is led down the garden path to destruction at least once every generation as a result.

Economists use seasonally adjusted data smoothing to produce an abstract impression of the actual trend. The seasonally adjusted data is revised multiple times, over several months and years, to fit the actual data. The SA number for the current month is typically only finalized after 5 years of additional data are available. That number often bears little resemblance to the initial release.

Because personal income and consumption estimates are built from such seasonally adjusted data components, we need to rely on a little common sense deductive reasoning to make an educated guess about whether this data is even minimally useful.

One way to do that is to compare the data with a similar series that might reveal the trend more clearly. In this case, the not seasonally adjusted retail sales data is a pretty good proxy for personal consumption. Monthly wage data is useful as a guide to personal income.

With all that in mind, here’s a look at the Personal Consumption headline number, which was +0.3% month to month. Meanwhile the 3 month average of the year to year change in actual, not seasonally adjusted real retail sales was a gain of around 1% or about +0.8% on average per month. That compared with a 3% gain in March. The momentum of retail sales has clearly slowed over the same time that the BEA data on personal spending was showing an uptick. That raises questions about their data.

Growth in Personal Spending vs. Retail Sales - Click to enlarge

Since the recovery began these two series have more or less tracked each other, with greater volatility in the changes in actual retail sales vs. the smoothed seasonally adjusted representation shown in the personal consumption data.  However, the personal spending data has persistently outperformed the retail sales data since early 2015. Something is fishy.

The year to year change in July real retail sales was a big fat zero while the personal spending data showed a big increase. I can only conclude that there’s something wrong with the seasonally manipulated data showing strength in personal spending.

Real Personal Spending and Real Retail Sales - Click to enlarge

Since the top of the housing bubble in 2006, real retail sales have rebounded to a gain of 6%, or roughly 0.6% per year. Real personal consumption has purportedly increased by 18% or 1.8% per year. The gap between the two yawned over the past year as retail sales stalled.

So we must be skeptical about today’s release. The question is, “Which do you believe?” Wall Street economists and their media PR repeaters would have you believe that the US economy is strengthening. But based on the retail sales data, that presumption is false.

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