Will 2013's Most Troubling Economic Trend Continue This Year?

If consumers don't finally jump on Wall Street's optimistic bandwagon, the deep divergence between America's two economies could stall us again.

Businessmen holding arrows next to dollar symbol
Getty Images/Ikon Images
From one perspective, it's clear that the sun is coming out again for the U.S. economy: 2013 was one of the nation's best years in decades. But closer to the ground, there's a fog bank shrouding the economic climate -- and a much different narrative, one that has been more cautious than those numbers alone can tell.

Analysts believe the market at large will experience another round of robust growth in 2014, despite an expected taper in the Fed's easy-money policy. But central to those upbeat forecasts is the notion that the average consumer is feeling better and better.

So, "average consumer," are you feeling better and better about the economy?

Don't Believe the Hype

Take a glance at the economy's many indicators from 2013, and it's difficult to be pessimistic. The Dow Jones Industrial Average (^DJI) rallied well above the 20 percent mark toward 17,000. The Nasdaq (^IXIC) leapt up more than 35 percent, while the S&P 500 (^GSPC) came in between the two at just under 30 percent.

New housing starts, which remain near historical lows, continue to grow beyond forecasts: They jumped nearly 23 percent in November to an annualized rate of more than 1 million. Analysts see the numbers growing nicely through 2015.

The official unemployment rate was 7.9 percent in January 2013. By November 2013, the figure had shrunk to 7 percent flat.

We could go on, but you get the picture: By the numbers, the economy looks strong.

Economists Are Confident; Consumers, Not So Much

While the economy at large has made a good stab at brushing off the dirt from its devastating fall, the consumer can't seem to forget that, not too long ago, an even more upbeat environment quickly turned sour -- too fast for anyone to take cover. That's making us more cautious.

According to The Conference Board's Consumer Confidence Index, the average American isn't feeling the same jollies as the stock market. Following a precipitous drop in October, the index fell an additional two points to 70 (the scale goes from 0 to 100) in November.

Specifically, the numbers seemed to reflect growing concern over business conditions (25 percent said conditions were "bad") and employment. The percentage of those expecting the job market to grow fell from 16 percent to 12.7 percent. There was similar pessimism regarding incomes, with fewer people expecting their incomes to increase.

However, once the holiday season kicked into high gear, things predictably improved. The CCI hit 78.1 in December -- its highest level since before 2013's government shutdown. Nearly all indicators reversed their defeatist trend.

So, are we finally seeing a real mood improvement, or was it just transient Christmas cheer?

Discover Financial Services (DFS) recently released its December Spending Monitor data, and it echoes much of the CCI report, with the number of consumers who see the economy improving up 5 percent to 30 percent. Yet when it comes time for people to put their money where their mouths are (what Discover calls people's "spending intentions"), more consumers are keeping a tighter grip on their wallets. Nearly 30 percent anticipate spending less on discretionary goods and household expenses this month than they did in December. Compared to the prior month, that's a 13 percent increase in those reporting they're going to cut back.

Such behavior, while logical (it makes sense to let the credit card cool down after buying gifts for the entire family), does cast some doubt over December's figures, suggesting they may mainly reflect seasonal optimism. And while the numbers offer plenty of insight into the American consumer's behavior over the past 60 days, they still aren't offering a conclusive answer to the biggest question: What is the real state of the U.S. economy?

A Matter of Interpretation

We live in a data-driven culture. Check into any news outlet and you'll hear plenty of facts regarding the economic indicators. These days in the financial world, the general outlook predicts a continued market rally, and rightfully so when you look at the numbers. The view from the top is sunny with a chance of rainbows. But Main Street isn't impressed.

The thing is, the consumer doesn't trust the system as much as they used to. We've seen how quickly all those upbeat indicators can change.

And not all consumers react the same way to the data. Expensive fashion brands are rallying along, as are sellers of big-ticket items, like, say, Winnebago (WGO). The iconic RV company saw its motor home deliveries jump more than 30 percent in the last quarter. The share price of Jeweler Tiffany (TIF) is at a 52-week high and it recently posted a killer earnings report. The "haves" are buying into Wall Street's sunny outlook. But what about the "have nots"?

Your average mall store is suffering in a big way, with specialty apparel stores like Abercrombie & Fitch (ANF) getting slammed. Part of this is due to changing trends in fashion, and the failures of some companies to adapt. But it's also related to the increasingly sharp dichotomy between the wealthy few and the rest of us.

Walmart (WMT), that bastion of all things cheap, can't seem to discount its goods far enough to drive sales higher. In mid-November, the company's CEO suggested that the blue-collar shopper isn't feeling the same jollies as Wall Street -- that food and energy costs remain high while wage growth is minimal. Their shoppers are still suffering from the greatest economic downturn since the Depression.

The Story to Watch in 2014

This is a truly fascinating trend, if slightly disturbing.

The mismatch between those two sets of data gives credence to the views of those pessimists who claim the market's recent gains are primarily a product of the Fed's quantitative easing, not true recovery, and that the stock prices don't have much to do with a real return to economic normalcy, let alone prosperity.

It wasn't an easy thesis to prove in 2013, as the $85 billion-per-month bond-buying program continued unabated. But 2014 will see the Fed's taper begin, and, if all goes according to plan, the bond-buying program could be cut down to zero before the end of the year. Investors, analysts, and consumers alike will keep an eye on how this impacts corporate earnings.

As the Fed's extremely easy-money policy vanishes into the rearview mirror, consumer spending will be more important than at any time since the financial crisis. Though the spending numbers haven't told the full economic story in the past few years, people need to keep buying clothes, homes, and cars. If they don't, even the currently rosy numbers will sputter and stall out.

Motley Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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119 Comments

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unitedpaintings

With Obama in charge it will.

January 13 2014 at 1:22 PM Report abuse rate up rate down Reply
allen and patsy

the article by Michael Lewis on the state of the economy is insightful and well thought out and written

January 13 2014 at 1:13 PM Report abuse rate up rate down Reply
hotcookingoil777

Id never buy stock in Bank America or TD Bank they foreclosed on the disabled ,the CEOs gave themselves bonuses with the bailout money that was intended for Loan mods.Now there left hold vacant homes.In addition the NSA is violating the privacy to consumers too causing a downtrend

January 13 2014 at 8:15 AM Report abuse rate up rate down Reply
Iselin007

Millions of diamonds are held off the market to artificially jack up the price while the miners endure hardships no different then slaves. The politicians make hardly a mention of these abuses of humans because they can pick and choose agendas that don't interfer with their personal wealth and election strategies.

January 12 2014 at 11:28 PM Report abuse -1 rate up rate down Reply
Iselin007

Some may feel they eased the suffering of third world countries by giving them our manufacturing jobs. But these politicians didn't give up their own jobs nor did they give up their own wealth.

January 12 2014 at 11:19 PM Report abuse rate up rate down Reply
Iselin007

The 74,000 jobs added in December 2013 will probably be air brushed in further reports as they always seem to be. I guess it depends on what they think they can get away with!

Seems longer the recovery takes the more brazing these bean counters get with their magic calculations. How many more people will be wrriten off as not in the workforce?

January 12 2014 at 11:00 PM Report abuse rate up rate down Reply
1 reply to Iselin007's comment
George

yep they added 74K jobs I also read where 374k people fell off the UE rolls lowering the rate by 3/10's of a point and. And Jan? that should drop almost a full point when 1.3 million lose their extended benefits.

January 13 2014 at 8:37 AM Report abuse rate up rate down Reply
Iselin007

obamasam0r0n2
"Too many retailers still downplay the potential impact of e-commerce. The fact is, naysayers' reactions to the Net are similar to those we heard 15 or 20 years ago from the United States when direct mail catalogs started becoming more prominent. One common preconception about direct mail was that it would work only with certain products. Another was that it was unreliable, that buying through the mail was too risky for consumers. Still another assumption was that if a retailer engaged in direct mail, catalog sales would cannabalize store sales. Do those reactions sound familiar? Well, all three proved to be myths, and—as they relate to e-commerce—all three will again, given time."

—John Quelch, Dean of the London Business School

Unfortunately there is a real problem being most of the large chain stores do have an Online presence and many are cross references by other sites which say what sites have a certain product ect. Many of the chains overall picture was glum.

January 12 2014 at 10:51 PM Report abuse +2 rate up rate down Reply
firstmy

You should start writing horror stories............fit's your MO

January 12 2014 at 8:45 PM Report abuse rate up rate down Reply
Iselin007

Don't swallow the CNC BS because the jobs were going off shore as far as the unfair trade advocates were concerned. The middle class is paying the price of all the bribes and kickbacks that on went on behind their backs.

January 12 2014 at 4:20 PM Report abuse rate up rate down Reply
Ken

Macy's will eliminate 2,500 jobs...

January 12 2014 at 4:17 PM Report abuse +2 rate up rate down Reply
1 reply to Ken's comment
Iselin007

Macy's moved into a lot of spots vacated by other chains that had gone out of business. There is too much saturation of the market at all levels in this poor retail enviroment now further hurt by Online sales. Stores often have several reasons why they close a particular location. They may not tell you all of them!

January 12 2014 at 4:29 PM Report abuse +2 rate up rate down Reply