Retail sales dropped by a large amount in December. Such a significant downward move is a bad sign for the economy. Because 70 to 80 percent of GDP is driven by the consumer, the move does not bode well for the economy’s health.
An interesting point is the how the internet potentially affects the economy. With everyone so readily connected, information flows much faster. As people get information quicker, they react quicker. Technology, while great, can and does affect the duration of all types of cycles from industries to economies.
In December, the stock market dropped precipitously. Outflows from mutual funds and ETF's have been steady ever since. Adding these events to one of the longest government shut downs in history and its deleterious effects upon many workers, and people start to psychologically feel the pain. It can imbue those workers with an extra sense of potential financial risk. The downside of that perceived risk is many will start to hold back spending as they begin to feel a lack of confidence in the continuing strength of the US economy.
The stock market, while financially based to some degree, also represents sentiment about the future of the economy. Behavioral economics are always a significant component. Many who participate in the market may be able to take the downside risk, but with those consumers with salaries in the 30K range, a loss represents a very big hardship. The average salary in the US is somewhere in the 30K range. Many 401K's are invested in the market, so when the market plunges, those folks feel the pain viscerally.
Home ownership is roughly around the 60% range. People generally don't own a home until their late 20's or early 30's. So, people in their early 40's that owned homes in the 2009 period will remember the financial pain they experienced just like those who lived through the pain in the 1930's and early 1940’s. Given that the late 30's and early 40's are generally some of the highest spending years for the average consumer, I would see those folks having a high adversity to perceived risks. The result could drive decreased spending. Once you burn your hand on the stove, you are much more cautious about hot stoves!
It appears that consumers are generally becoming much more cautious in their spending habits. This does not portend a favorable view of the economy’s health moving forward.
A wise man once said, “Anything that can change, will change.”
