The break down in the relationship between consumer confidence and actual spending is something that has been nagging at me for awhile.   This picture:

While confidence is at recession levels, real personal consumption expenditures continue to grow at a reasonable clip.  Should confidence numbers be totally dismissed, or do they signal an underlying fragility among households that should not be ignored?  Some hints at an answer may be found in the September income and spending report.  Notably, real personal disposable income looks to have rolled over:

So where is the spending power coming from?  A plunge in the saving rate:

It looks like households are struggling to hold onto the even meager spending gains achieved since the recession ended, and that struggle may be what is reflected in the consumer confidence numbers.  Overall, this suggests to me that consumer spending is much more fragile than commonly believed.

Manufacturing activity also looks shaky.  To be sure, it is reasonable to expect some momentum from the surge in equipment spending in the third quarter.  But it is also reasonable to believe that some of this demand was pulled forward as firms try to get ahead of the expiration of the accelerated depreciation benefit.  And even with that surge, note the ISM report surprised on the downside this morning.  On the positive side, the new orders measure climbed back above 50, while on the negative, both the export and import components fell.  The latter point is a troubling indication of spillover from slowing manufacturing activity in China and Europe.  A contraction in global activity isn’t exactly what we need at this juncture, especially as it will first bleed through to what has been one of the bright spots in the US recovery.

Bottom Line:  With all attention focused on the Greek drama, plus the well-received Q3 GDP report, it has been easy to overlook the underlying fragility in the US economy.  This was especially the case when US equities looked to be on a nonstop trip to the moon.  Perhaps the US economy can squeak through the next few quarters, and perhaps, in contrast to my expectations, Europe is able to bring an end to the crisis with limited collateral damage to the economy.  But I can’t shake the feeling that the US economy closer to running on fumes than is commonly believed, and will run out of gas in a very hostile global environment.

This post originally appeared at Tim Duy’s Fed Watch and is reproduced with permission.