Pressures on the Consumer

Is anyone surprised that the economy has slowed and 2Q GDP came in at 1.5%?  I am not because if you live in the real world then you see, live and read about the trends and costs associated with the US economy.  About 70% of the US economy is derived from the US consumer.  You don’t need to be a PhD from Harvard to understand the economy; you merely need to live, read and watch TV to see current consumer trends.

Let me share a few clues as to what is happening and where we are headed.  Drought.  Have you turned on the news or weather channel lately?  The Midwest is in a severe drought, which is pushing up costs of agriculturally produced foods and feed, particularly corn.  Corn is especially important, as it serves several markets, including chicken and hog feed, ethanol and human consumption, to name a few. If you look at the chicken and hog producer news releases you will see that feed costs have really climbed in May, June and July.  This not only cuts into their profits but also causes them to try to pass some of these costs to the purchaser (restaurants and grocery stores) and then ultimately to the consumer.  Did you look through the earnings or announcements from the restaurants?  For instance, Buffalo Wild Wings did not have good news for two reasons: higher chicken prices and slower foot traffic into their stores.  BWW can’t lower prices to attract customers because their costs are going up and they have a stock to worry about and earnings to expectations to meet, so they try to raise prices on the customers to offset these higher costs, but this then results in more and more people not eating out or at a less expensive restaurant.

Let’s talk about gaming, or what I like to refer to as discretionary spending.  The year started out on a normal basis, but after spring break, the main gaming sites of Las Vegas, Atlantic City and the Midwest really started to slow. Not only is foot traffic and spend at the casinos down, but so is table hold.  I wanted to see for myself how slow Las Vegas was, so I flew there for a day on a trip back to Santa Barbara from Portland.  My wife loves to shop and I have been known to try to hedge this with some dice rolling.  True to what I was hearing and reading, Las Vegas was a ghost town.  Both the cabbies and table dealers said it was the slowest since 2008.  Nearly every store was having a sale and the mall traffic was light.

A few more anecdotes:

Ford Motor reported slower sales this past period, which is another example that the consumer is turning off spending.

The Chinese government is now using fiscal stimulus to try to spur growth.

The Euro Zone is in a recession, and look at all those empty seats at the Olympics.

Would you rather loan corporations money at the top of the capital structure and have a date certain of when you can expect your loan repaid (maturity), or instead buy their equity at the bottom of the capital structure and have no idea if you will even have your money in the future?

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