I spend a lot of time discussing Consumer Spending; Its not because I am a shopaholic (although I do know where you can buy alot of cool stuff at good prices, as well as find decent eats).
I track this stuff ’cause the consumer is responsible for 70% of all the economic activity in the in the United States.
Therefore, if you want to have a clue about how the economy might be doing next year, you have to understand more than a few things about the U.S. Consumer. We most recently visited this issue in "Shopped Out?"
In my book, there are 5 key elements to watch:
1) Income: Do they have a ready supply of spending dough? Is it going up, so they can maintain present spending levels?
2) Debt: Have they spent too much? Can they service the debt they have already run up?
3) Deflation/Inflation: Is inflation eating into their spending power? Is deflation encouraging them to hold off purchases until items get cheaper?
4) Pyschology: Are they in a spending mood? Is there anything weighing on that mood?
5) Spending: Too obvious to even discuss.
The idea is to have 5 quantifiable elements — objective and measurable — to guide our expectations for what is likely to happen next year. (No, there are no guarantees — just higher and lower probability events).
Over the past 24 months, all five of these elements are in the process of decaying.
• Personal Income has slid all year; Today’s report shows a continual drop;
• That Personal Income is actually worth somewhat less, given the significant increases in prices (inflation). In particular, oil and gasoline have had a big impact; I expect in the Winter, natural gas will also.
• Speaking of Inflation: Prices paid for commodities have doubvled over the past 4 years; This does not include health care, education, or other services.
• Sentiment continues to weaken. Its not just Gas prices and Iraq and the disappointing response to Katrina — its a full spectrum of issues.
• Debt: The WSJ reports that "A record 4.81% of credit-card accounts were past due in the second quarter, up from 4.76% in the first quarter." This number (past due
credit-card bills) has risen to a record this year." (American Bankers Association). The ABA said that "Delinquency rates rose for nearly all of the eight types of consumer loans the ABA tracks." (The exceptions were Property improvement and Mobile home loans).• Spending: Dropped a significant 0.5% this month — thats the biggest drop in nearly 4 years, since November 2001.
I had said a few months ago — long before Katrina and Rita — that the potential for a recession was increasing. Its not too hard to imagine the scenarions how this can occur: Interest rates tick up, home refinancing fades, and a big source of spending cash disappears. Its also not to hard to imagine the Fed cutting rates if this scenario comes to pass.
Investors should be aware that Risk levels are on the rise . . .
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Sources:
Past Due Credit-Card Bills Reach Record in U.S.
By DEBORAH LAGOMARSINO
DOW JONES NEWSWIRES
September 29, 2005; Page D2
http://online.wsj.com/article/0,,SB112791105549854452,00.html
CREDIT CARD LOAN DELINQUENCIES REACH RECORD HIGH IN SECOND QUARTER 2005
WASHINGTON, Sept. 28
http://www.aba.com/Press+Room/092805DBULL.htm
U.S. August Personal Spending Falls 0.5%; Incomes Drop 0.1%
Carlos Torres
Bloomberg, Sept. 30, 2005
http://quote.bloomberg.com/apps/news?pid=10000006&sid=a8ODacamitqI&refer=home
if there is a housing bubble and it bursts, retail might burst as well. people could change behavior big-time to save money-
please note i am not necessarily saying i think the above scenario is probable or improbable
This is a great summary of the Achilles’ heel of the US economy: consumers. I just want to point out that the CRB Index post Katrina hit a high within .52 points of its all-time 1980 high of 337.60 (not adjusted for inflation). Today there is big selling in the gasoline and oil futures (which look very toppy to me) and with the CRB so much overweight energy, I would expect a pullback here (could be bigger than consensus expects). The CRB pullback may be too late to save the consumer though.
This one from Barry Ritholz
Its a good idea you read Barry Ritholz blog with his thoughts on the consumer. We have covered many of these in our market letter, but this is a darn good summary. I posted some comments there about the CRB index and here is the chart so you can see wha
But you said that more saving was a good thing
After many of us have been arguing for some time that an increase in the U.S. personal saving rate was key for promoting long-run growth and reducing the trade deficit, th…
Its interesting to point out that Credit Card delinquencies went up to record levels just after the new Bankruptcy Law was passed (largely due to the laobbying efforts of Credit Card lenders). Coincidence?
You can save your money by applying for appropriated credit card. (for exaple at http://www.bestcreditoffers.com ) Now I use Chase Bank cash rewards platinum Visa. As you can see this card is worth using for day to day purchases.