Consumer Spending Slowdowns and Bear Markets

Yesterday (via Doug Kass), I noted that the Consumer had grown increasingly levered. Why is this so important? Because of the relationship between Consumer Spending slowdowns and Bear Markets:

Bear markets begin when growth in real consumer spending (PCE) peaks and begins to slow

click for larger graphic


Source: Joseph H. Ellis, Ahead of the Curve

Ellis notes: 

The relationship between economic slowdowns (led by downtrends in year-over-year consumer spending) and bear markets (vertical yellow bars) is remarkably consistent, though not infallible, over many cycles. Most bear markets begin (see circles) when the year-over-year rate of growth in consumer spending is peaking, and investor and general business optimism are at their highest! Considerable courage is required to reduce investments at such times.

What's been said:

Discussions found on the web:
  1. B commented on Feb 9

    Great book! I ran out and bought it the first week it was available. Although Jeff’s work is really coincident and prone to false readings, he basically smashes traditional economic analysis in favor of one simple point: The consumer drives the whole engine. What would all of those economists do with their fancy charts and mountains of graphs if all one needed to to was plot generally available data to get confirmation of the state of the economy….at least that is what appears to be the case over his tested time frame.

    That means the blabbering prognosticators who say capex will take the place of the consumer in 06 are going to be proven wrong if the consumer closes his/her wallet.

  2. Uncle Bob commented on Feb 9

    Well, sometime i think we see what we believe and this appears to be a study in circleology to me. It’s hard to tell if the PCE actually leads or follows the S&P EPS! A cross correlation with various leads and lags might be instructive. The 00-05 data resemble the the 92-98 data to me and hence may be indicating a raging bull market, hence a little better statistical analysis would help. The 62, 77, 90, & 00 “circles” don’t appear to represent significant variation from the preceeding 3 months, so that’s 4 out of 8, or a coin toss. And I can count at least 8 previous cases where the decline is similar to that indicated for the end of 05 where no bear market appears to have occurred.

  3. David Silb commented on Feb 9

    Economics is a derivative of Demographics, No people no Economy. So the consumer is always king. (Long may they rule.) Anyone who discounts the need to consider Labor/Consumer in his or her economic policy is on a collision course with disaster.

    Ultimately the end user the consumer must always pick up the bill and reap the rewards. If this doesn’t happen then the consumer stops spending and you get a downturn.

    If the consumer can not sell his resources (time, skills, and proximity) in the market for wages in order to buy finished goods, then who will?

    This piece really demonstrates this historically. Good graph.

  4. zanzibar commented on Feb 9

    There will always be a single data series that explains a phenomenon. The question is what are the collection of leading data series that have proven reasonably reliable from a probability perspective and where are they now?

    There is no doubt that risk appetite continues to be strong. Despite the multitude of head winds all the asset markets remain relatively healthy.

  5. Bruce Campbell commented on Feb 9

    A couple of comments on the above, particularly to Uncle Bob. One great advantage we have found in the PCE is that it is reported monthly, while S&P Earnings are given quarterly. We can get a good read on S&P after about 2 or 3 months into the quarter (that sounds odd, but you should see how slowly the data comes in), but the information becomes almost historical. These charts give a false impression of what it is like gathering data at the current end of the chart. In fact, we see the turn in PCE at least two months before a clear read on turn in earnings. and sometimes you can’t see a TREND in the S&P for two or three quarters, while we can see a strong trend in PCE in 4 months, giving several months of warning.

    So PCE is a leading indicator insofar as we can get it earlier than earnings. It just looks coincident.

    Second: Sure, lots of turning points turn out not to represent bear markets (which are a 12% reduction in the S&P500). However, if someone is investing and buys right after one of those turns, they are running the risk that this is the turn that hurts.

    Third: No one chart gives you the complete picture. Some of the later charts at the site show the influence of interest rates on PCE. Also, I think the charts on real wages are very persuasive. If real wages are going down, personal consumption is likely to go down, particularly when the prime rate is going up, as it is going to cost people more to buy goods and services.

    Anyway, there is lots more to say, but Joe says it best. I’ll send him this post, but I’m sure he will be pleased both by the praise and the critique.

    Best, Bruce

  6. LDB commented on Feb 9

    Gosh, if I got all my news from your website, I would certainly be under the impression that the sky is falling tomorrow!

  7. ron commented on Mar 10

    what was consumer spending on photos in 2005 ?
    thank you ron

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