Friday, July 6, 2007

How Confident Are Consumers?

From CBS Marketwatch:

Consider this news from Tuesday:

* Sales at retail chain stores continued to weaken in the last week of June. The International Council of Shopping Centers index barely grew week-over-week, while the Redbook index fell to a cyclical low, with same-store sales up just 1.2% compared with a year earlier.

* Vehicle sales declined for the sixth straight month in June. In the past six years, sales have been weaker on only two occasions. At the same time, the automakers have stepped up their production, setting up the industry for another round of layoffs and production cutbacks.

* Home sales fell again in May. The National Association of Realtors said the number of contracts signed on previously owned homes fell 3.5% to the lowest level since the recession.

* More consumers fell behind on their debt payments in the first quarter. The percentage of loans that were 30-days past due rose to the highest level since the recession of 2001.

The news in prior weeks hadn't been much better:

* Home prices fell 2.7% in the past year, the biggest decline in 16 years. A 2.7% drop may not seem like much, but considering how hard it is to get homeowners to accept less than they paid for their house, it's startling.

* Homebuilders got even more depressed about their industry. The housing market index fell to a 16-year low.

* Delinquencies on home mortgages are rising, especially for subprime loans. Unfortunately, delinquencies and foreclosures are also rising for borrowers with good credit who took out adjustable-rate loans. That's unheard of when the unemployment rate is under 5%.

* The stock market, after a nice run up from March to May, has been flat over the past seven weeks.

* Consumer prices rose 0.5% in May, the fastest monthly increase in 17 months.

* Real take-home income (that is, adjusted for inflation) has fallen two months in a row, after a big boost in the first quarter that mostly went to the ultra-rich who received mammoth bonuses and stock options. For the rest of us, the picture is a well-known story around kitchen tables: The median hourly wage, adjusted for inflation, has fallen four months in a row through May and was up just 1.1% in the past year.

* The personal savings rate was negative for the 26th consecutive month in May.

Over the last few years, I've written a fair amount about the heavy indebtedness of the US consumer. The short version is household debt has increased from a little over 70% of total US GDP in 2001 to over 90% in the fourth quarter of 2007. In addition, over the same period of time household debt has increased from over 90% of disposable income to over 130%. Mortgage debt is the primary reason for this increase, as households went on a huge home buying and mortgage equity withdrawal binge over the last few years.

However, I also predicted that the high debt load would lead to a recession or economic slowdown. While the economy did slow in the first quarter of 2007, predictions are for an increase in the second quarter. In other words, my analysis was right by my conclusion was wrong. At least it was wrong.

Is something different now? Has consumer spending reached a point where it will no longer increase, driving economic growth? I don't have an answer for that. However, the initial signs are the consumer is slowing his purchases -- at least for now.

However, history has demonstrated the US consumer loves to shop, and will do almost anything to continue shopping. The US economy has had more than ten straight years of quarterly increases in consumer spending.

For now, I will punt this question but will be thinking about it for quite some time.