Tuesday, February 15, 2011

Christmas Hangover?

Retail sales for January were released this morning but were disappointing, staying flat with December's growth rate of 0.3%. Since consumption spending is 65-70% of GDP, it matters . . . a lot!

The mystery to me is why anybody expected the higher growth rate of 0.5%? Despite last week's rise in consumer confidence, the consumer is wisely more interested in reducing debt than increasing spending. The ratio of debt obligations to income has dropped to levels not seen since 1985. That is one of the primary reasons that confidence is up. Increases in spending do depend on increases in confidence, but confidence can increase without an increase in spending.

Still, this is the seventh straight month that retail sales have increased, which is very good, but it is rising very slowly . . . just like the economy. There is no logic to the continued rise in the stock market. Futures indicate the market will be down slightly today . . . good! A slowdown in market appreciation now is far better than a sharp drop later!