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Anticipating Consumer Slow Downs

Posted By Barry Ritholtz On February 10, 2006 @ 8:45 am In Consumer Spending,Investing,Wages & Income | Comments Disabled

On Wednesday, we noted that the consumer had become increasingly leveraged [1]. Yesterday, we looked at the relationship between consumer spending slowdowns, and Bear Markets. [2]

Today, we go back even further up the causation ladder, to look at the question "How can we anticipate when Consumer Spending is about to slow?"

It turns out there’s a reliable tell that gives lots of warning prior to a Consumer Spending slowdown: Real hourly earnings.

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Best leading indicator of real consumer spending (PCE) downturns
click for larger chart
W1007 [3]      

Source:  Joseph H. Ellis, Ahead of the Curve [4]

Ellis notes:

Real hourly earnings downtrends of a year or longer have been a generally reliable leading indicator of consumer-spending downtrends. Real hourly earnings gave particularly notable advance warning of the 2000–2002 economic downturn.

Real hourly earnings are reported on a pretax basis. Therefore, in the mid-1980s and 2003-early 2004, strong gains in consumer spending despite slowing real earnings were an anomaly reflecting federal tax cuts in those periods.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/02/anticipating-consumer-slow-downs/

URLs in this post:

[1] increasingly leveraged: http://bigpicture.typepad.com/comments/2006/02/consumer_grows_.html

[2] consumer spending slowdowns, and Bear Markets.: http://bigpicture.typepad.com/comments/2006/02/consumer_spendi.html

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/w1007.jpg

[4] Joseph H. Ellis, Ahead of the Curve: http://www.aheadofthecurve-thebook.com/10-07.html

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