Useful from an investing perspective

Alan Abelson of Barrons is always a colorful and entertaining read. Frequently I do not find him particularly useful from an investing perspective. His recent reporting on John Williams’ take of our third quarter economic results I thought was valuable. Of course, I think Williams’ work is usually spot on, so that is likely why I appreciated Abelson’s report.

Or perhaps I liked Abelson’s report because it runs counter to the giant propaganda machine that our media and government operate. Then again, it might even be simpler than that. It has been said that you cannot learn what you don’t already know. Or that you always think someone is brilliant when they agree with you. The latter is especially dangerous for investors or others making important decisions.

With that caution in mind, here is Mr. Abelson’s commentary:

ALWAYS ALERT TO THE SUNNY SIDE of events, it occurs to us that one of the most positive aspects about the crisis in the Old World is that, by comparison, it makes our own economy look pretty darn good. Gosh, didn’t the Bureau of Economic Analysis report on Thursday that gross domestic product in the third quarter grew at a reasonably decent annual rate of 2.5%, nearly twice the previous quarter’s anemic pace?

But wouldn’t you know, no sooner did we start to swell with a smidgen of patriotic pride than along comes the astute John Williams, the main man at Shadow Government Statistics, who, after his usual painstaking analysis, declares the supposed 2.5% gain “outright nonsense.” And, indeed, he sees it as fresh proof of his contention that GDP is the most “heavily biased, heavily guessed at, heavily politicized and most worthless” measure of the economy foisted on us poor peasants by the powers that be.

John’s convinced that, in truth, the economy is limping badly. And while we believe that the consensus view that the recovery is still inching ahead is quite arguable, our conviction on this score doesn’t rise to the fierce and noble level of John’s ire. What makes us especially uneasy is less the manifestly flawed optimism inspired by some of the dubious data, than the very real yawning gap between consumer income and outgo.

In September, by way of illustration, personal income rose all of 0.1%, while consumer spending climbed 0.6%. To keep shelling out more than they earn, Jane and John Q. used plastic a bit more aggressively and chipped away at their nest egg. In the process, personal savings shrunk from 4.1% to 3.6%.

And, as virtually any working stiff can personally attest, wages are either rising by minuscule amounts or, for the most part, not at all. The latest Employment Cost Index reading showed a teeny uptick, 0.26%, the smallest since the measure’s debut in 1982.

Logic, which is not prominent in the investment lexicon, would suggest that a pinched consumer, whose house is often underwater, whose job is anything but secure and whose paycheck is unremittingly eaten into by sharply escalating medical costs and painfully higher food and gas prices, is destined to cut down on his spending, even as he pauses in his deleveraging.

Since no little part of the lukewarm recovery is the result of an anticipatory inventory build by business, a reluctant consumer could obviously be a damping influence on even the most rabid bull. In any case, it makes for a gathering cloud over the investment environment that you ought to keep a cautious eye on, especially with animal spirits strongly on the rise.