Wednesday, November 28, 2012

Sales, Income and the FUD Factor ... Brighter Days Ahead? ... I'm Betting YES

Our nation's future prosperity depends on solid economic growth, and attaining that solid growth will in turn result in increased sales. Of course, this happy outcome will very much require increased consumer confidence to drive the necessary sales growth.

And therein lies both the reason for hope and the cause to worry about our American economy's future prospects.

With all the negativity in the world today, what will the U.S. consumer do? Sit back and watch or feel confident and start spending again? I'm betting on the confident consumer returning to the fold sooner rather than later. And if not confident, at least not running away from buying like a scared rabbit.

So let's begin our hopeful discussion with the negatives affecting consumer spending and end with the positives.


A climate of fear, uncertainty and doubt is pervasive among consumers. We'll call it the FUD factor.

If we're fearful, uncertain and doubtful about the future, that's a recipe for pulling in our horns and hoarding our assets. That belt-and-suspenders behavior will then result in lower sales.

And since our economy is two thirds dependent on consumer spending, FUD induced spending behavior will translate into fewer jobs and less income. Which in turn will lead to increased FUD and the vicious cycle continuing on its not-so-merry way.

Throw in a huge amount of outstanding consumer debt that needs servicing, including underwater mortgages on our homes, and that consumer wealth depletion results in even more consumer FUD.

Sounds pretty bleak. Right?


But fear not, my fellow American. Brighter days are ahead, even though reported sales have been pretty weak for several years now.

Weak Revenue Is New Worry for Investors relates the headline bad news on sales growth confronting  us:

"While corporate executives obsessively watch the bottom line, practitioners of the dismal science prefer to focus on the big picture. Lately some have found reason for concern in the part of companies' public reports that is up top: sales. . . .

That is significant because while margins fluctuate, revenue generally tracks nominal gross domestic product. Third-quarter economic growth of 2% beat forecasts, and that is likely to be revised higher when updated figures are released later this week. Meanwhile, estimates for fourth-quarter growth have slipped to 1.8%, according to a survey by The Wall Street Journal. Even that may be too high if sales keep slipping.

The composition of S&P 500 revenue provides reason for guarded optimism. The sectors with the least growth were materials, energy and utilities. Lower commodity and energy costs can aid the rest of the economy.


Another reason to relax—about the U.S. economy—was that disappointing revenue correlated with international exposure. Slowing growth abroad and a strong dollar pinched revenue.

McDonald's Corp. saw flat sales in the third quarter compared with a year earlier, but revenue would have risen by 4% without currency impacts.

On the other hand, McDonald's also gave a worrying preview for the fourth quarter: October saw its first monthly sales decline in nine years. And the U.S., rather than foreign markets, led the drop.

Instead of exchange rates and commodity prices, the explanations for another round of weak corporate revenue may be homegrown woes such as the fiscal cliff. With economic growth already so close to stall speed, corporations' top lines need to get into a higher gear."

Summing Up

Without sales growth, there will be no economic growth. So the current situation is definitely worth watching closely as sales either exceed or fall short of expectations these next several weeks, months and quarters.

I'm betting on better than expected sales and encouraging news on the fiscal cliff negotiations, too.

One other positive sign is that sales declines are occurring primarily in the materials and energy sectors. This means lower costs, which in turn means better prices for consumers down the road.

Price deflation in energy and commodities would be a welcome sign for consumer spending in 2013 and beyond.

Thus, we could have a happy combination of higher selling volumes, flattish dollar sales and lower consumer costs.

If that occurs, real sales would show gains, and jobs would begin to reappear as businesses increased output to satisfy the increased consumer demand.

My optimistic assessment is admittedly perhaps a bit of a stretch and certainly nothing we've seen for a long, long time. But consumer price deflation need not be a negative.

We certainly need something to eliminate all the FUD surrounding us today, and lower prices for consumers may just do the trick.

Thanks. Bob.

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