One of themes I wrote about earlier this year was that I expected economic activity to continue to decelerate, consumer trends to shift toward less spending and more saving and long-end Treasury yields and mortgage rates to decline to record lows. All of this was to be part and parcel to a surge in first-time home buying next Spring.
One of the issues I wrote about in the column, "Restaurants Reflect Consumption Trends (Literally)," was for these trends to be evidenced in a decline in restaurant sales.
So far that part of the continuum has indeed played out as anticipated.
The Restaurant Performance Index for August, which is the latest available, continued to decelerate, as it has all year, and actually went below 100, which indicates a contraction in the industry has begun.
This trend was also reflected in the two ETFs most closely aligned with the restaurant industry, The Restaurant ETF (BITE) , and PowerShares Dynamic Food & Beverage ETF (PBJ) which are down about 5% and 6%, respectively, since I wrote about this issue in July.
The decline in restaurant sales was reflected as well in declines of broader consumer discretionary sales as evidenced by the 7% decline in PowerShares S&P Small Capitalization Consumer Discretionary ETF (PSCD) , and the 2% decline in Consumer Discretionary Select Sector SPDR ETF (XLY) .
The only ETF of the group I discussed in July to be positive, has been the PowerShares Dynamic Leisure & Entertainment ETF (PEJ) , which is up by about 3% due to its concentration in the airlines.
For the most part, though, consumer discretionary spending has been declining.
What has not happened, however, is a decline in the long-end Treasury yields. The 10-year yield has moved to 1.77% from about 1.57% in the past three months as bond investors have focused more attention on expectations for rate hikes by the Fed and the increasing rhetoric concerning the need for fiscal stimulus, than on consumer spending or economic activity.
That trend also stands in stark contrast to the rapid reduction in expectations for economic growth during the second half of the year, which is most easily expressed by the Atlanta Fed's GDPNow forecast of a 2% real GDP growth rate in 3Q from the 3.75% forecast of early August.
The decline in The Conference Board's Consumer Confidence Index for October, released at 10 a.m. this morning, validates the decline in consumer spending and the GDPNow forecast, too, and may as well be a reflection of the increase in mortgage rates I wrote about in the column, "Housing Activity Shows No 'Paradox of Thrift."
Those confidence numbers, following the increase in mortgage rates of late, also caused the two home builders I've been advocating as buy-and-hold targets ahead of next Spring's housing market, to get crushed today.
I'm not quite sure why long-end U.S. Treasury yields persist at levels not warranted by economic activity. Coupled with bond investors' focus on the Fed and fiscal authorities, it might simply be an indication of angst concerning the elections in the U.S., which will dissipate after the results are known.
In any event, the totality of the economic data indicates that the rebound in economic activity that was expected to occur in the second half of the year has not only not materialized but is signaling that the secular deceleration in growth is still well in force.
As I discussed in the column, "Economy Is Caught in a Vicious Cycle," that indicates that long-end Treasury yields should also continue the secular decline they've experienced since the early 1980's.
This should eventually cause the 30-year fixed conventional conforming mortgage rate, and the 30-year and 10-year U.S. Treasury bond yields, to break below 3%, 2% and 1%, respectively, which I addressed in the July column, "Rates Eventually Should Rate First-Time Home Buyers' Attention."
As a result, I'm still of the opinion that positions in Beazer and Hovnanian should be kept or added to.