This past week we released our economic forecast for August which is indicating the weakest growth since 2010. There are forces working against economic expansion on Main Street.

Also this past week, there was a major decline in the Conference Board Consumer Confidence index. What caused this decline? Consider that Main Street does not react to what is going on in Greece – it reacts to changes in costs and income – or its perception of items which could effect income or spending.

Income Ratio to Spending

The consumer is still consuming although the consumer's spending relative to income has been elevated since Jan 2013. There has been only four periods in history where the ratio of spending to income has exceeded 0.92 (April 1987, the months surrounding the 2001 recession, from September 2004 to the beginning of the 2007 Great Recession, and for some occasions since late 2013). A high ratio of spending to income acts as a constraint to any major expansion in consumer spending.

Seasonally Adjusted Spending's Ratio to Income (a increasing ratio means Consumer is spending more of Income)

Econintersect views this chart as a major obstacle for economic expansion. Currently both income and expenditures are growing at approximately the same rate – and income must grow much faster to reverse this headwind. Further, consider that consumer credit is growing faster than GDP and consumer income. This erodes the ability of consumers to spend more in the future.

Relationship of Retail Sales to Employment

The beginning of an economic expansion sees the growth rate of retail sales improving faster than the growth rate of employment. This is logical as consumption drives employment. At the end of an expansion cycle – consumption growth slows relative to employment.

What is the current relationship between the year-over-year growth rate of non-farm private employment and the year-over-year real growth rate of retail sales? This index is currently negative. When retail sales grow faster than the rate of employment gains, this ratio will be above zero (on the below graph).