U.S. Consumers Crushed By Inflation, Double Dip Insight

(eToro Blog) Any hope for a steady recovery of the U.S. economy is heavily dependent upon U.S. consumers to support future growth, given that consumer expenditures account for more than 60% of GDP. A recent data release by the Department of Commerce's Bureau of Economic Analysis shows that personal consumer expenditures, or PCE, declined in April to 0.4%, below economists' earlier predictions of 0.5%. The PCE data for the previous month was reported at 0.6%, revised from 0.5%.

Separately, the Bureau reported that personal income in April fell by 0.4%, given that March's data was upwardly adjusted from 0.4% to 0.5%.

For all intents and purposes, the numbers could be worse; the individuals who make up the lower and middle income classes (i.e. more than 90% of the population) continue to struggle to pay off existing debt, and worry about their employment outlook. While consumer confidence levels have been rising, and are expected to show improvement when the upcoming Reuters/Michigan Consumer Sentiment poll is released later today, consumers remain wary, thus they hold tight to their purse strings.

The Federal Reserve Bank has well documented that they will continuously monitor the economic trends to assess the need for monetary tightening; there's little doubt that today's PCE data will be keenly scrutinized. The Fed considers the PCE a strong indicator of future inflationary trends, as any increase in personal expenditures is likely to stimulate inflationary pressures further. That would put additional pressure on the central bank to raise interest rates.

Today's releases are further confirmation of the U.S. economy's fragility, but they also point to an eventuality that is far more disturbing. It's true, the U.S. economic recovery is in jeopardy, but that will be of little consequence to the American consumer who is in danger of drowning. Simply put, higher prices and falling incomes equate to more consumers in danger of finding themselves underwater.

When looking at the recently released pending homes which virtually collapsed more than 11% from last month it becomes clear .As consumers are sinking under water they are pulling the US real estate along with them. Just by examining the exposure of US banks to the real estate sector it is clear that credit will suffer as well. And guess what when credit dries up consumers sink even deeper. Hence it is clear that the US recovery is a thin crust with deep holes underneath, holes called consumers.

As the trading week draws to a close, markets will eagerly await next week's release of non-farms payroll data, hopeful that some positive indicator might be forthcoming. The U.S. Dollar is trading lower for the second consecutive day, sending gold higher as an outcome alongside Dollar peers such as the Swiss safe haven the Sterling and even the Euro.

Meanwhile on the eToro trading floor sentiment among eToro traders of the EUR/USD pair favors selling over buying by a margin of 63 sellers to 37 buyers. Sentiment for the AUD/USD pair is similar, with a margin of 8 sellers to 3 buyers.