EWFF, October 2005
Back in the summer of 2004 when car buyers held out for discounts, The Elliott Wave Financial Forecast identified the development as “bad news for car companies and the overall economy.” The decision to wait for lower prices last July was a big deal because, as EWI has continually noted, deflation is a state of mind, and “a willingness to forestall purchases is one of its primary attributes.” Early this year, U.S. car companies pulled themselves out of a renewed sales slump by selling new cars and trucks to the public at the same low price offered to employees. After saying the program would end in August, GM extended it another month. But sales of new cars and trucks fell anyway, by 16.6% from the same month a year ago. The decline was attributed to “consumer fatigue with employee pricing deals.” In September, after initially extending the employee-pricing scheme, GM abandoned it for “everyday” low prices.
The same “fatigue” is registering in Wal-Mart’s stock price, which is at its lowest level in four years, as well as plunging consumer confidence, which just suffered its biggest point decline since the start of the 1990 recession. In another sign of surrender, credit card delinquencies rose to a record high of 4.81% in the second quarter. Our stock market section covers a host of different areas in which the free-spirited ways of the bull market are giving way to the sobering influence of a third wave of Primary degree. These declines signal its arrival in the consumer, who will probably complete the transition from impulsive spendthrift to cautious tightwad faster than most can fathom. Changes like the newly-restrictive bankruptcy laws will kick in and contribute to the coming new conservatism.
The U.S. President called for consumers to “pitch in” and avoid “a trip that’s not essential.” He is encouraging the White House staff to turn off lights, printers, copiers and computers when they leave the office, scaling back on his motorcade and cramming more reporters into fewer press vans. Presidents always fail as economic cheerleaders in bear markets. Nixon and Carter both resorted to conservation measures in the decline of the 1970s. The exhortations of Hoover and Roosevelt in Supercycle IV, a bear market that lasted through 1949 in inflation adjusted terms, is a better parallel. With consumer spending on food, housing, clothing and automobiles down 40% to 65% from 1929 to 1933, they did everything they could to get consumers buying again. Once the economy turns down, it probably won’t be long before Bush’s turn-out-the-lights effort gets cast aside for a 1930s style “get-out-there-and-spend” program.
EWFF, May 2005
Reporting from Seoul, Stephen Roach of Morgan Stanley writes, “Here in Asia, they have only one question for me: How’s the American consumer? Most react with sheer disbelief when I even dare to mention the possible demise of the American consumer.” On his Asian swing, Roach is telling clients of a mismatch between what consumers earn or have in the bank and what they are spending. “Believe it or not, one client out here was so angry with me he actually tore my chart of the vanishing personal saving rate into tiny little pieces. Asians want to believe that the income-short, saving-short, overly indebted American consumer will never stop spending.” On the contrary, he will probably soon be a net seller.
In finance, desperation and hope are an explosive combination. Violent disappointment is the usual result, and this chart of consumer sentiment is a picture of the fuse being lit on one of the world’s larget bombs. EWFF has tracked the consumer’s arc through the nether reaches of extreme optimism since shortly before the Dow’s all-time high in 2000. In January 2004, when sentiment popped back above the “fateful 100 line,” EWFF identified the burst as a sure sign that a “knock-out punch is still ahead.” The key to that forecast was the 5-3 form of the action since the all-time highs. As it turns out, sentiment’s three-wave rally was complete at that time. The chart at right also reveals a close tie between consumers’ vitality and stock prices. Both the Dow and consumer confidence peaked in January 2000 and bottomed in March 2003, along with the European stocks and many U.S. averages adjusted for dollar weakness. The March peak for stocks has been accompanied by a decline of almost 10% in the confidence index. Since this is a third-wave decline for consumer confidence, a downside explosion that alters the face of the U.S. economy should occur over the next few months.
EWFF, September 2004
With retail stocks breaking through their 200-day moving average and Wal-Mart and the International Council of Shopping Centers ratcheting down sales forecasts, it is clear that consumers’ behavior is reflecting a deflationary psychology. Economists’ complete blindness to this event is apparent in stories about a July uptick in consumer spending. “The American consumer is back,” said the New York Post on Tuesday. After falling 0.2 percent in June, personal consumer spending rose 0.8 percent in July. “The easing of consumers’ restraint is welcome news for the economy,” said The New York Times. A few economists started to sweat over consumers’ “sudden stinginess, but the recovery of consumer spending – which accounts for about two-thirds of economic activity – has rekindled some faith in the economy’s staying power.”
It’s true, there is a “new spring in consumers’ stride,” but a closer look at the monthly spending numbers reveals an important new development that takes the shine off of the consensus assessment of economists. Most of the June drop in sales of durable goods was from a fall in auto sales, and virtually all of the July’s rebound was also due to cars. The head of market and industry analysis at General Motors explained that the July pop in sales was due to the “summer sell-down,” when car makers offer deals to clear the lots. “Consumers are timing their purchases more. That has changed.” This development is bad news for car companies and the overall economy. As EWI has long noted, deflation is a state of mind. Consumers’ decision to wait for lower July prices is a sign that this mindset is taking hold, as a willingness to forestall purchases is one of its primary attributes.