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Investing Specialists

Consumers' Crisis of Confidence

New higher savings rates mean the consumer has the wherewithal, if not the confidence, to spend more.

For the past several months I have noted that improved consumer spending has been driven largely by spending on consumer electronics--computers, televisions, and audio equipment. While I was glad to see that consumers had enough confidence to spend on anything, spending on electronics often causes a significant boost in imports.

This week, import data came home to roost as the trade deficit jumped to $49.9 billion in June, far above last month's reading of a $42.0 billion and far above consensus forecasts. The market reacted negatively to the news on Wednesday, when the Dow Jones Industrial Average fell 265 points.

The news was significant in that a rising trade deficit means that the GDP growth for the second quarter will have to be revised down to the range of 1%-2% from an already meager 2.4% announced at the end of July. Imports can also serve to break the virtuous cycle of ever increasing spending leading to more production leading to more employment leading to more spending. If the increased employment comes from overseas, and those workers don't spend an equal amount on U.S. goods, the positive loop is at least partially broken. Of course, exports, which were a little soft in June, can offset some of that leak.