David Rosenberg: Shared sacrifice will be required, we will have less government, fewer entitlements. Disinflationary pressures will intensify.
From David Rosenberg of Gluskin Sheff
Our hedge fund desk has always told me that among the most reliable cyclical indicators for the American consumers is the restaurant sector. Traffic is slowing down precipitously and the companies are issuing negative guidance.
I took a look at the monthly details from the latest PCE data and saw that in nominal dollars, consumer spending on eating out sagged 0.4% in October and has contracted now in three of the past four months. The YoY trend peaked at +5.7% in July and has since slowed to +4.4% which is the softest pace in eight months (the three-month trend which a year ago was running at 7.5% at an annual rate is now close to stall-speed of 2%). As a sign that families are becoming more cautious in their spending and eating habits, grocery shopping is up in two of the past three months and at double the trend (at 4%) of the restaurant industry.
The downward trend in “eating out” has broader connotations, by the way.
Now that everyone is focused like a laser beam on Fiscal Armageddon, it may be more appropriate to be looking at what is happening on Main Street rather than Washington. Looking ahead, it is going to be more about the economy, and taking it a step further, at times like these, it is important to understand where the real economic power resides, and that is with the people.
And not just where they shop, but where they eat, in this era of frugality.
In the meantime, it is reasonable to assume that disinflationary pressures will intensify. As the tax base gets broadened and entitlement reform takes hold, an enormous amount of shared sacrifice will be required. Less government will require a move towards tighter budgets and this will contribute to stress in the job market and after-tax personal incomes, at least for a while. Attitudes are changing radically as there is a growing acceptance among public sector unions and civil servants that the way they spend and save is going to undergo some radical changes in the future.
Furloughs, layoffs, and now less-generous pension benefits for current workers and retirees are occurring for the first time ever. Sweeping changes are taking place at the state level as pension trustees and legislatures push for higher monthly contributions to pension plans, a later retirement age and lower annual cost-of-living adjustments for current and retired workers. Unions (those that don’t make Twinkles, in any event), are making the concessions because they can see the future absent shared sacrifice — the termination of defined benefit plans in favour of defined contribution plans. Be that as it may, employee contributions are going up — a de facto tax hike. And this will work directly against any upturn in consumer spending when you consider that the state and local government sector employ nearly 20 million people or 15% of the national job pie.
So we will have less government, fewer entitlements and more whisperings that it isn’t just the $250,000+ high-income households that are going to experience tax increases and diminished disposable income growth. This is shared sacrifice. To think that the nation could have ever gone to war in Iraq and in Afghanistan under the Bush regime, putting our troops at great risk not to mention the emotional scars on their families, while here at home civilians would be allowed to enjoy tax cuts and a debt-financed consumption binge. This is something worth contemplating as everyone joins in to redress a national balance sheet that has gone parabolic.