Change In Consumer Sentiment

From The New York Times:

For two major retailers reporting quarterly results on Tuesday, consumers appeared to be holding back.

Steeper price-slashing did not lure customers into spending more at Wal-Mart, while shoppers at Home Depot spent less and put off big home improvement projects or big-ticket items like appliances.

Both Wal-Mart Stores and Home Depot posted second-quarter profits on Tuesday that beat analyst estimates, and both slightly raised their full-year earnings guidance for the year. Yet their results suggested that American consumers were not spending as much as had been expected.

“Both of them managed to get to earnings through something besides sales,” said David Strasser, an analyst at Janney Capital Markets. “I think things are getting worse, not better, for consumers.”

Comments:

Consumers are becoming tapped out.

And consumer spending has approached 70% of the total economy in recent years.

So what happens when consumers become concerned that their paychecks will not last the entire month and they can't get additional credit?

They cut back their discretionary spending.

One indicator of this is the change in the M1 money multiplier.

Note that the money multiplier fell off a cliff in 2008/09 despite Quantitative Easing and has trended flat or down ever since.

This shows the economy has a strong tendency to neutralize the increase in the monetary base, and that is an indicator of deflation.