By Sy Harding, Street Smart Report
Evidence is beginning to pour in that rising energy costs and inflation in general are finally beginning to affect consumer confidence and spending. Since consumer spending accounts for 65% of the U.S. economy, that it might happen has been a major concern of economists for more than a year.
Until recently, even as inflationary pressures increased, consumers seemed not to care. Measurements of consumer confidence remained strong. Consumer spending remained high, even though requiring increased levels of debt to finance the spending. Purchases of big-ticket items like automobiles and homes even led the way.
However, economic reports of the last week or so indicate that situation is changing.
The willingness to borrow and spend apparently hit a wall for some consumers several months ago. The American Bankers Association finally got around to reporting this week that credit-card delinquencies reached a record 4.81% of all credit-card accounts in the 2nd quarter of this year. Interest rates, gasoline, and other energy costs have risen further since the second quarter, taking even larger bites out of consumers' pocketbooks. So delinquency rates surely rose further in the current quarter, and are surely destined to rise again in the 4th quarter, when dramatically higher heating costs check into the mix.
Same story, second and third verses, the Commerce Department reported on Tuesday that new home sales plunged 9.9% in August. And in a release covering more recent conditions, the Conference Board reported that its Consumer Confidence Index plunged a huge 19 points in September, from 105.5 in August to just 86.6 in September.
It was the biggest one-month drop in consumer confidence in 15 years. The last occasion was in 1990. As an indication of how important consumer spending has always been to the economy, while as usual it wasn't recognized until well after the fact, in 1990 the economy was already slowing into the 1990-91 recession.
Finally, on Friday, the Commerce Department released its consumer income and spending report for August, which added further evidence of problems in consumer land. Consumer income fell 0.1% in August, while consumer spending declined 0.5%.
The drop in spending was the largest since November, 2001, when once again as we learned months later, the economy was already in the 2001 recession.
With the economy obviously so dependent on consumer spending, some of the questions being debated regarding the rebuilding of New Orleans, where the money will come from, the need for more oil refinery capacity in the U.S., etc., may not be as important to the well-being of the country, including Louisiana and the rest of the Gulf Coast, as whether a slide into recession can be avoided this time.
That obviously would require quickly reversing consumer confidence. How is that done?
After declines in consumer confidence and spending led the country into the 2001 recession, it took the most aggressive stimulus package ever out of Washington, tax cuts, tax rebates, and the lowest interest rates in forty years, to put easy money in the hands of consumers and get us spending again.
Even if it wanted to, Washington would have problems coming up with that kind of program again, due to the record budget deficits. In fact, Congress is talking about eliminating some previously approved tax cuts in the wake of the expenses of Katrina and Rita. The Federal Reserve could reverse direction and begin cutting interest rates. But it also has a problem this time. Unlike in 2001, energy prices are spiking and overall inflation is threatening, making it difficult to even stop raising rates, let alone swing around to lowering them.
On the bright side, the major depressants to consumer confidence have no doubt been the spike up in gasoline prices, and the shock of the Katrina and Rita disasters. Barring yet another hurricane, both of those situations should begin to improve. It certainly seems to be Washington's intention to at least throw a lot of money into the Gulf Coast rebuilding process. And given that some of the most recent spike in oil prices has been due to commodity traders and hedge funds jumping aggressively into the situation, crude oil prices should level off and drop back some as more Gulf Coast refineries and pipelines come back on line.
But whether that would be enough to reverse consumer confidence to the upside again is questionable, since it's too late to avoid dramatically higher heating costs this winter, and unlikely that gasoline prices will drop much below $2.50 a gallon.
Meanwhile, the all important Christmas shopping period, which many companies depend on for as much as 50% of their annual sales and profits, is rapidly approaching.
So keep your eyes on consumers. After providing the main support under the economy for several years now, consumers will still be controlling what happens going forward.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 505 East New York Ave., Suite 2, DeLand, FL 32724, publisher of The Street Smart Report, 1 year, 17 issues, $250 (now in its 18th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, 1 year, $225. Timer Digest has consistently ranked Mr. Harding in the Top Ten Timers for Stock Market Timer, Gold Timer and Bond Timer since 1990. In his 1999 book, Riding the Bear - How to Prosper in the Coming Bear Market, Sy Harding outlined a simple strategy that works in bull and bear markets. Mr. Harding's Seasonal Timing Strategy (STS), continues to significantly beat the Dow and S&P 500, doing so over the last one-year, two-year, three-year, and five-year periods, and back-tested for the last 10, 20, 35 and 50 year periods. It did so with its normal two trades a year, using just an index fund, and did so with half the risk of buy and hold investing, as the strategy is in cash between 4 and 8 months every year. Visit www.StreetSmartReport.com for FREE stock market commentary and a Special Trial Offer.
