Something Really Strange Just Happened With This Economic Data

The government just reported income statistics for the month of February 2025 that defy all reason logic and don't seem to make a whole lot of sense. One reason why is spending data from the same outfit which looked nothing like income. What it did look like is all of these corporate warnings that we're getting from companies like Lululemon who were just reported that they're not thinking all that highly about where the consumer economy is going. In fact, what they said was consumers seem to have just disappeared in February and especially March. And that simply corroborates everything we've been seeing in a whole bunch of other data from consumer confidence to retail sales and market pricing and positioning. So there's a whole lot of evidence that's still coming in suggesting the U.S. consumer economy is indeed in some form of distress that is over and above what we've become used to here. We're getting the evidence from all these different sides from company reports, from government data, from anecdotes, stories, even social media and financial media as well. So Steve, Mr. Van Meter, let's start with the income statistics. What the Bureau of Economic Analysis reported was a sharp increase in incomes in the month of February. Remember February, the payroll numbers, the payroll number was okay, but ours were not. And the household survey suggested that there was a massive decrease in employment as well as full-time jobs. So where does this income statistic come from? It doesn't really matter. Jeff, I don't think it matters at all, but I have a hunch that it's about transfer payments. I mean, it's the only thing that makes sense here because I'm not hearing from anybody who's out there working saying like, I'm getting a massive pay raise or things are going really good. So to me, this has to be about perhaps some big government transfers that are showing up. Yeah. So I mean, when you look at income stripped of the transfer payments and adjust for prices, because as we know, prices have gone up more recently, real income excluding transfer receipts was basically flat in February, which sounds a little bit more in line with all the rest of the data. Plus, when you look at the last three months going back to the end of November, and these are the same three months we've been talking about where the loss of momentum really started to hit, real income excluding transfer receipts is basically up to 0.2% in three months. 0.2% is basically nothing. So I think that starts to lead us into why are consumers pulling back in spending? Well, if your incomes aren't enough to keep up with prices outside of what maybe Uncle Sam is giving you, you're sure as hell not going to be going to the store like Lululemon store to buy more yoga pants, more expensive yoga pants. Instead, you're going to be going to Walmart. But even Walmart has said, Yeah, our consumers aren't spending there either. So it's not just like it's not like one segment of the economy is functioning and others aren't. It's really coming from everywhere, right? Yeah, Jeff, I think you've got this exactly right. The issue is we're seeing consumers balk at higher prices. And despite the fact that real incomes were up, it doesn't account for everything. So we already know the consumer price index doesn't factor all the expenses a household has. We know things like insurance costs are rising at a fast pace. We know energy costs are still relatively high. And there's other factors here. So despite even though it went up 0.2% over the last few months, it's still not enough. And that's what we're seeing in the real economy is consumers are saying, Wait a minute, you know, prices are going up here, but my income is not going up enough. And that's why we're seeing households cut back on their spending. That's why we're hearing, you know, retailers like Walmart, Lemon, Target, everybody else saying, Wait a minute, we thought consumers were going to come out and spend, then they didn't, but we were still optimistic. And wow, they're really cutting back even what we're hearing at the dollar stores are that consumers there are cash strapped. And this is the first time we're starting to hear from executives saying that our customers are running out of money before the end of the month, not exactly a positive sign for incomes. If the job market isn't great, incomes are not really flowing like the way they need to suddenly you get hit with a heating bill on top of the massive increase in as you said, Steve auto insurance premiums in January. I mean, it's we've been talking all this time about consumers eventually getting to the end of the road, they were going to be exhausted, they exhausted all their savings. They had really nowhere else to turn the job market contrary to everyone's expectations and all the hype has never hasn't really been that good to begin with. And maybe it turned to the worst here in 2025. Suddenly, consumers really have no other place to go a credit card. You know, they've been maxing out credit cards and falling further behind a lot of a lot of consumers are falling further behind. We've seen delinquencies rise for credit cards as well as auto loans. That's another big one. Consumers can't afford auto loans. And that has been one of the one of the key supports to the overall economic spending in the economy for the last year or so. I mean, it's all of these things happening all at once really coming together. And it's everybody's blaming terrorists for this one. It's really just the economic situation that we began with has been moving in this direction for a long period of time already. Yeah, exactly, Jeff. But what we're seeing now is that consumers are reaching a breaking point. This is the first time we're really actually have seen that because, as you mentioned, you know, people were maxing out their credit cards. They're trying to bet on the system and say, hey, you know what, I'm going to keep spending because things are going to turn around in my favor. Now they're seeing that, you know, things aren't turning around. You know, and we get this very, very clear evidence from the economy in terms of how consumers are reacting because they're starting to save more. You know, they're looking at the job market. What do we hear from the government? Yes, non-farm payroll board. See, there's jobs being created. We look at continued unemployment claims. So yeah, okay, they came down a little bit, but they're still relatively high for this cycle, not prior cycles. I think the real issue here, Jeff, is people are going to work. And yes, in some cases, they're pretty busy because there's been a lot of pulling forward of demand, particularly at the production level. But what's happening is workers are asking questions. What comes next? And the bosses say, we don't have anything. There are no more. We get this done. We clear the backlogs and we've got nothing. And I think that's what workers are starting to react to is the fear that when all this demand gets pulled forward at the top level, that's going to lead to not just some hours cut, there's going to be a lot of people hitting the unemployment line. And that's why we're seeing a change in their habits. I don't think they're just rejecting higher prices. I know they are, but they're going a bit further. And that's the change here. Yeah, I know this will shock you, Steve, it'll be a complete surprise to you. We heard from Lulu Lemon as sort of representative of this entire process was that inventory soared by almost 10% over last year. So that was them, okay, pulling forward all of this demand. And I know you never talk about inventory and inventory bloat or anything. So they pulled forward all of this demand to beat tariffs expecting that they'd be able to sell it off. Because I mean, let's face it, Jay Powell said the economy is strong and resilient. The labor market, everybody says is tremendously robust. So obviously, consumers were going to continue to spend. So they brought all this inventory in and now they find out consumers disappeared. We got all this inventory, which continues to cost them financing costs, holding costs, and a whole bunch of management costs among everything. So they got all this inventory. And it's not just Lulu Lemon, what are they going to have to do? They've got to either get rid of it at a tremendous discount or sit on it for a long period of time. Neither one of those options, they're going to call the factory or they're really going to call the wholesale, who's going to call the factory and say, hold up, we don't need any more stuff. So as you said, the payback period for all of this artificial high that we saw at the end of last year has already begun. And the initial reaction to it among businesses as well as consumers has been oh crap. I mean, for businesses, okay, we got way too much inventory, we got to do something about that. But for consumers, you just mentioned Steve, the statistic you always bring up, which is the personal savings rate. The personal savings rate was falling down around 3.3% in December, at least according to the latest statistics. Then it rose to 4.3 in January, now it's 4.6 in February. And that sounds good, but it's actually not for the rest of the economy. Because what that says is consumers are saying, whatever the income is, we can debate about whether the income statistics are realistic or not. Whatever the incomes are, they're not spending it because they are more concerned about the future than they are about keeping up with what they just did in the past. You know, Jeff, that's right. In a debt-based, consumption-based economy, it's not what you make, it's what you spend that matters. And what consumers are saying is we're not spending because we have to prioritize our savings. And as you know, as well as I do, there's a wonderful relationship between the savings rate and retail sales. So as consumers save more, they spend less. And so this gets really interesting because nobody was expecting an inventory recession. And now it's looking very strongly like that's going to be another factor that could lead to some outright deflation, but a lot of disinflation. Because you think about from a business perspective, executives were thinking, hey, the Fed's telling us, as you said, the economy is strong and robust. Look at the labor market. Meanwhile, they're cutting hours of their own employees and jobs. So they think, great, we're going to buy as much inventory ahead of these tariffs. And then we're going to market up and sell for a higher price. And you're going to watch, consumers are going to flood in here and buy, and we're going to have some really big profits. And I think they're shocked that even with the announcement of the tariffs, and everyone knows there's more coming, that consumers didn't spend. Because you and I said very clearly over and over, consumers can't afford prices where they're at today. Why anyone thinks that they can afford it at an even higher price is absolutely baffling. And yet you see it all across the supply chain. Everyone I've talked to as businesses, I said, are you really dealing with tariff issues yet? And their answer is, ask me when I run out of my inventory. Yeah, exactly. And it's funny, too. I mean, it's not really funny. I mean, you look at the statements, for example, that Lululemon came up with. It was exactly what you described. It said, okay, they were expecting everything to happen, that if we raise prices, then consumers will come in and pay for it. And really, you know what the idea here was. They're going to raise prices and then have a sale. They're going to say, okay, we raised prices. Here's our tariff sale. We'll raise prices by 20% and then give you 10% of the higher price. But what Lululemon said, or at least the write-up of it was, Chief Executive Officer Calvin McDonald said that U.S. shoppers are keeping their wallets tight and visiting stores less often amid geopolitical strife and high inflation. I love how they throw inflation here because it's not really inflation. Like you said, Steve, it's we have to raise prices because our input costs have gone up. And as we're raising prices, it would be inflation if we could pass it along to consumers. But what they're saying is we can't pass it along to consumers because as soon as it looks like we're going to raise, they don't even have to raise prices. As soon as it looks like they're going to raise prices, the stores are empty. Everybody just disappeared. And it really comes back to incomes. It comes back to incomes and job perception. Consumers disappeared because they're worried about jobs and income. So those higher price yoga pants, I'm going to put that off maybe till the fall or later on or, you know, fashion or even just the big ticket items that Target was talking about that are likely to go up in tariff prices. You saw a bunch of people buy what they could last year, and now they're like, OK, there's nothing I could do about a higher price stove or washer or whatever because I can't afford to buy it at a higher price to begin with. And there's no it looks like the job market isn't picking up. It's actually going in the other direction. So I'm just I'm done shopping for the next little while. And it just leaves the economy to exposed because all of this this first of all, this is all unexpected. Businesses were not expecting this. And secondly, they need it. They need the economy. It's almost like the old shark analogy, right? They got to constantly swim. You got to constantly bring in new business, got to constantly move stuff out the door. When you hit this period, these periods where consumers stop showing up, there's really only one thing they can do is just cut everything, cut prices, cut hours, cut jobs, cut everything. And Jeff, they're going to have to. There's an article I read today and there was a quote that just made me laugh. It was said that consumers are resistant to higher prices. And that's not the case. You said it clearly. It's about incomes because you know what? If prices go up, my incomes go up at a faster rate. What do I care? It doesn't matter. But yes, I'm completely resistant when I go to spend money and I can't afford to buy the stuff I need, let alone the stuff I want. But you're right about this inventory thing, because everything is finance. I think a lot of people don't realize that, but we can put it in perspective of automobile dealerships. They don't pay for cash for their vehicles. They finance them. It's called flooring the vehicles. So if you've ever gone to a dealership, particularly at the end of the month or at the end of the quarter, what happens is they're eager to sell things. And if you find one that's been on a lot longer than everything else, they'll give you a great deal on it because the financing costs are eating them alive. So when we look at businesses like Lululemon and other companies that have just drastically driven up their inventory levels, they're going to be facing a problem when it doesn't move. One, it's just the ongoing cost of holding that inventory. So they're going to have to discount it. The other problem is they're going to have to leave people off because they've cut expenses everywhere they can. The issue now is you've got all this inventory, you've got all this expense, and it's going to eat right into your profits. And we know executives, what they don't want is to see their stock price get crushed here. And that's likely going to be a knock-on effect of what we're going to see. Because based on what we're seeing right now from consumers based on their savings trends, and again, this isn't just American consumers. We're seeing this in Canadian consumers as well. We're seeing this all over the world. They're balking at higher prices. They're prioritizing savings. They're afraid of losing their job. And that's setting up not just for a payback period, as you said, Jeff, that we should be getting from the pandemic alone. Now we're going to get a double payback period from the tariffs as well. And just to be clear, this isn't just the goods economy factor either, goods economy process or problem. We're seeing some of the surveys for services turn really ugly. I did a video earlier this week, we talked about Philadelphia Fed Services Index, which plunged. It plunged to its lowest level since 2020. Not only did the headline plunge to the lowest level, we had all the internal components say the same thing. Services industries in the Philadelphia region were saying, something big has changed more recently. And it wasn't just Philadelphia either. Just sticking with the Fed Regional Survey, the New York Fed Services Survey, that one fell sharply too. Chicago Fed Services, that one fell sharply too. Richmond Fed, the Richmond Fed Services was positive. In fact, it was really positive late last year on the artificial boost. Suddenly that turns negative in February and is probably going to be even more negative as we go forward. The only one we don't have for March so far is from Dallas, Texas, the Dallas Feds Regional Survey for Services. And I imagine it's not going to look all that great because the Dallas Feds Manufacturing Survey, which had been moving higher all throughout last fall and into the winter, that one already turned around and turned lower as well. So this isn't just an issue for manufacturing or a couple of retailers that have inventory and therefore the supply chain is overly stuffed with goods. It has already impacted the services sector because of course it would, right Steve? We're talking about consumers. If you have to pay more for goods that you need, where are you going to cut back from? Where are you going to cut back from service? Because a lot of services is discretionary spending. That's the first place it really starts to hit. So if high, what is it? As consumers bulk at higher prices, they're going to take it out on the services sector as much as the goods sector. Well Jeff, it's not just the fact that consumers are bulking this hitting the services sector. A lot of people don't know that manufacturers spend a lot of money on services. So if you think about this, if you're a manufacturer right now and you're seeing all this front-running demand and then you're looking at your order book going like, oh god, things are going to get bad. Is the fax machine broken? Why isn't it running here? You know, you've got some issues. Well, what are you going to turn and do to your service providers that are providing things to you as a business? You're going to say, look, I need to cut back. I don't need, you know, all these things that you're doing in the months to come because I don't have the demand for it. And that's really the issue here is services. I think it's going to get a double hit, not just from consumers saying, look, I can't go and get as many massages or whatever it is I'm doing because I got to save money. Businesses are now on the same point. That's a big problem because a lot of services companies, a lot of small businesses, Jeff, have really been hurt over the last few years. They've been desperate for any reason to raise their prices and to pass it on to consumers. Now they're finding out, yeah, you've got a little bit of that price increase passed on, but now it's coming at a cost and this is going to hurt. The real question here moving forward is the second and third order effects. That's what economists talk about all the time. And they're actually correct to do so because as you see the pullback in consumers, they're bulking at higher prices. They don't have the incomes to pay for things. Then they start cutting back. But how does the rest of the economy respond to that additional pullback? If the rest of the economy says, OK, we'll just take the hit and we'll keep going as we did before, things can smooth out relatively well. But if everybody else is already in the same boat where they're saying, OK, consumers pull back and they're already negative and pessimistic to begin with, suddenly you start to pull back too. It leads to the self-feeding, self-reinforcing vicious cycle. You get to that feedback loop that where consumers pull back, businesses pull back, which means jobs are increasingly a problem, consumers pull back even more, and you get locked into the self-reinforcing spiral that we all know of as a retraditional recession. That's really the question that the markets are struggling with is because we see all of the precursor or ingredients for something like that, one after another, after another, after another fall into place. The only one that doesn't fit is the income stats for the month of February. I think that's more of a one-time type of thing or even just a seasonal adjustment because the rest of the income statistics like spending show everything is coming together at the wrong time and in the exact wrong way.