Never Underestimate the American Consumer

Despite the threats that the EU debt crisis may spill over and affect U.S. GDP growth, economic data has come in pretty good lately.

ISM manufacturing and services indices were better than expected. Auto sales were solid. The ADP private payrolls was much better than expected. Yesterday’s new unemployment claims number was in line.

But perhaps the best numbers yet were yesterday’s retail sales data for September. The International Council of Shopping Centers (the OPEC for retail?) said revenues were up 5.5%.

That’s certainly a surprise after the "recession" rhetoric reached a head in September. Let’s not forget that the stock market can be quite conflicted at times: it’s forward-looking, but it can also miss things happening right under its nose. Like what consumers are doing…

And let’s not miss the importance of this: consumers are the lifeblood of the U.S. economy. They (we) account for 70% of the economy. Any suggestion that the U.S. economy goes into recession has to include lower spending by the consumer.

So the question is: does the situation in Europe, or China, for that matter, lead to lower spending? Not necessarily. I seriously doubt anyone decides not buy a pair of pants because Greece is going to default on as much as 50% of its debt.

The point is, consumer spending falls as a result of a shock to the economy that leads to higher unemployment. The debt problems in Europe are well known. While we may not know the full extent of the potential fallout from this, it’s not likely to be a shock to the system.

That brings me to an interesting point about unemployment. Some guy from GE Capital was on CNBC yesterday morning, and he observed that small businesses with market caps between $5 million and $1 billion have hired 2 million over the last year, while large companies have fired 4 million.

What’s more, a recent survey from IBM (NYSE:IBM) shows that 80% of these small companies will hire more people in the next year.

In addition to the fact that these numbers debunk the idea that businesses are not hiring because of uncertainty about fiscal policy, they also show that there is clearly demand in the U.S. economy. And it’s a reasonable assumption that it’s the small businesses that are agile enough to meet current demand.

I’m sure there are plenty of reasons why the big companies are the ones still struggling to expand their businesses. And I also don’t want to say that just because small businesses are doing well that it’s straight up form here for the U.S. economy. However, if you want to look for downside catalysts for U.S. GDP growth, watch China, not Europe.

Pay attention to the latest news from the Euro Central Bank. While I’m still mystified by Angela Merkel’s need for more proof that Euro-banks need to be re-capitalized, the ECB has re-introduced year-long emergency loans for Euro-banks that allow them to access as much cash as they need.

That’s important. While the EU has been painfully slow to deal with Greece and its banks, solutions are being implemented, slowly but surely.

It’s likely that we get some finality on Greece and the Euro-banks in the next 4 weeks or so. If that can coincide with a decent 3Q earnings season, I think we have a terrific set-up for an end of year rally.

As for consumer spending, early estimates for holiday shopping suggest 1.5% to 2.8% gains over last year. I’ll go on record now and say holiday sales will hit or exceed the upper end of that range. After all, never underestimate the American consumer.

*****Write me anytime: [email protected]. Have a great weekend!