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

By Michael Lewis, Daily Finance

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.