A good gauge for me on how consumers in the U.S. economy are faring has always been the statistics coming out of Wal-Mart.
Wal-Mart Stores Inc. (NYSE/WMT) reported its operating income in its second quarter (ended July 31, 2014) declined by 2.4%. Its subsidiary, Sam's Club (wholesale store), saw its operating income, after taking out fuel, decline by 10.2%. (Source: Wal-Mart Stores Inc., August 14, 2014.)
For its entire 2015 fiscal year, Wal-Mart now expects to earn in the range of $4.90 to $5.15 per share compared to its previous estimate of $5.10 to $5.45 per share.
The performance of Wal-Mart is very important to economists like me because the massive reach of Wal-Mart is a good indicator of consumer spending. Wal-Mart is the biggest private employer in the world, with a staff of approximately two million, and the largest retailer in the world. More than one hundred million people visit a Wal-Mart store weekly.
So when Wal-Mart comes out with soft earnings, it gives me a reason to be concerned about the direction of consumer spending. But that's not the only thing I'm worried about in respect to the economy.
According to FactSet, of those major public retailers that have reported their second-quarter same-store sales, 46.8% of them have reported sales below estimates.
Retail sales are stagnant for the simple fact that consumer spending is getting very soft here in the fifth year of the so-called economic "recovery."
Below is a chart of the widely followed University of Michigan Consumer Sentiment Index.
As you can see, consumer sentiment has tumbled to its lowest level in nine months. Consumer sentiment essentially tells us where consumer spending is going.
Dear reader, don't buy into the mainstream conception that the U.S. economy is in recovery mode. Sales at the world's biggest retailer are very soft; consumer sentiment, as the chart above shows, is collapsing.
That means consumer spending, which makes up two-thirds of U.S. gross domestic product (GDP), is in trouble. We can't grow our economy, or the profits of large American companies, if consumers are pulling back on spending. Hence, my concern over stock market valuations.