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On Friday a number of key economic reports came out that showed a very different picture of the US economy; that being Personal Spending and Personal Income.   These are important in the United States as 70 % of this economy is driven by consumer spending.

Businesses may do what they want and often do but consumer spending is the cornerstone of the American economy and has been for some time.   Each time you see a new automobile or a new home being built, it means that some point someone is going to own that car or home.

The report on Friday showed a decrease of 0.2 percent when a plus 0.2 percent was expected.   Personal Income was completely flat with no gain whatsoever.   In contrast Chicago PMI rose to 58.7 percent when 50.3 percent was expected.   This means that businesses are spending capital and any number above 50% is considered expansion.

Businesses, especially larger enterprises have the capital to spend.   Why?   During this past recession they reduced their payrolls by 8 million persons and forced whoever was left to work longer hours without pay.   And we wonder why Personal Income is flat?   The irony of this is we could see a situation where consumers aren’t spending, businesses reduce output, forecasts, etc. and we could start to see a period of deflation which is just as bad as inflation.

What a difference a day makes.   On Thursday everyone was saying that the housing crisis is over in the United States.   Really?   I have a house right next door to me that been vacant for FIVE YEARS and Bank of America doesn’t know what to do with it.   The family who lived there moved back to Latin America and is still paying property tax on the property so the township can’t legally foreclose on it and Bank of America won’t do a short sale on it.   Yet if you read the headlines on Thursday they stated “It’s Official Housing Crisis Over” and the market rose.

Yet Friday tells a different tale.   Businesses are spending money.   They’re spending money on buying other businesses or “investing” in properties, stock purchases, etc. but they aren’t spending money on increasing the wages of their employees.   When are businesses going to learn that employees in this environment are stakeholders?   When a business goes under who suffers the most? Employees do.   When a business increases the wages of employees they are guaranteeing not only loyalty but also the fact that those employees will spend and grow the economy and when that happens, everyone benefits.

Recently there’s been a huge controversy over raising the minimum wage in the United States to $9.00 an hour.   The GOP in this country is dead set against it because they don’t want to create a burden for small business.   Yet this report tells me they have the capital and if they didn’t they wouldn’t be in business at this stage of the “recovery”.   They would have been out of business years ago.

Need Proof?   Take a look at Japan during the 1990’s.   They went thru a “lost decade” of flat earnings, flat growth and deflation.   Everyone afraid to buy because it might be less tomorrow, not more and “hey, my wages aren’t growing so unless I absolutely have to have it, I’ll wait”.

That’s the mindset of deflation, afraid to buy because it might be worth less in the future, unlike inflation which has the exact opposite effect.   Unless we see a change in the mentality of business owners who only wish to see economic servitude, we may well see a “lost decade” in the United States and I would venture that there are some economists who believe it’s happening now.

Further reading:  ECB: Decent chance of a negative deposit rate, just not in June; Fed to taper in 2013