Consumer Spending Rises

For the U.S. economy to sink back into recession, or for corporate profits to make a meaningful decline, consumer spending must contract. It really is as simple as that.

And the simple fact is: the American consumer has been steadfast since the financial crisis.

We see the results of consumer confidence polls swing wildly. Respondents can be ecstatic one month, and despondent the next. The last University of Michigan survey showed the worst number since November of 2008.

And while you might think the notion of confidence in the economy and in one’s job would have an impact on spending, it doesn’t. People say a lot of things, but at the end of the day, it’s what they say with their wallets that counts.

So even in July, when we saw some dismal consumer confidence numbers, stocks were getting whacked, and economists started pondering another bout of recession, consumers put up the biggest increase in spending since February.

Perhaps even better, income, wages and salaries have risen two months in a row. Yes, the old Wall Street saw "never underestimate the American consumer" still applies.

I’m tempted to start talking about holiday spending, but it’s a little early for that.

We’ve seen earnings estimates for the S&P 500 get revised lower by around 5%. And we’ve seen GDP estimates for the U.S. and the world as a whole get lowered, too.

That’s a good thing, too. It would seem that expectations have been running a little high for this economic recovery. It’s too bad that moderating expectations has to go hand in hand with a sharp correction for stocks, but ultimately, the fact that expectations have come down is a good thing. Given the persistent skepticism among investors that earnings growth can continue, a slew of quarterly earnings misses would no doubt spark a bigger correction than we’ve recently seen as investors worst fears are confirmed.

In short, the stock market has let off some steam, and like a controlled burn, that helps keep it healthy.

I gotta say, I was impressed with Bernanke’s speech from Friday. I never expected the Fed to start QE3, but the fact that Bernanke put the next stage of economic recovery squarely on government’s shoulders is encouraging. Because let’s face it: both Congress and the Obama administration have done more harm than good.

Now, I’m not naïve enough to think that Bernanke’s speech might motivate government. If default and a +9% unemployment rate can’t push government into real action, then probably nothing will.

Part of the bullish bias today is coming from Greece, of all places. Greek stocks are rallying, and Bloomberg says they are on pace for the biggest gain in 20 years. That’s surprising, to say the least. I’ll admit, I didn’t know Greek stocks had done so poorly over the last 20 years.

It’s being reported that a couple Greek banks will merge. Seems to me that just creates one big weak bank where there were two, but if the market likes it, maybe it’s good news.

Despite oday’s rally for Greece, Europe remains a major source of instability. And I wouldn’t expect the good vibes for Greece and Europe to last very long. The "sell Europe rallies" trade has been working for over 18 months. No reason to think it stops now.

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