Tuesday, October 04, 2005

BARRY FOCUSED ON: Consumer Spending, Personal Income, Credit Card "Issues"

The Big Picture: Consumer Spending, Personal Income, Credit Card Issues"

Barry is right on the money in that 70% of the US economy is consumer spending. However, we are moving into the part of the economic cycle when business capital spending carries the day. Spending by consumers will be relatively slow for the next several years. For the past several years, many consumers have used their homes like big ATMs. They withdrew equity and spent the money. The cost was virtually zero in terms of cash flow. The low rate refinanced loan was sometimes used to pay off higher cost debt. Low long-term interest rates were locked-in.

Those who live on the edge (which is a large number) must now make monthly payments on their home mortgages for years without being able to to go back to the equity well; perhaps or perhaps not?

The slow down that Barry writes about has come hard and fast. The disruptions in gasoline production are slowing the national economy. The debate continues to rage as to how slow? The spending on the rebuilding will be a powerful stimulus to the economy but the shut in of gas has a national effect now. I discounted this effect after Katrina but the Rita effect is longer lasting.

CAL just announced the suspension of some flights and an increase in ticket prices of $10. Of course, the other airlines need to play tit-for-tat. If they don't the suspensions and price increase will not hold. I expect the others to join the game; voluntarily or per force. If the airlines are short on fuel, they must cut some flights. The leverage is there to fly fewer planes at substantially improved margins per flight.

Businesses have cash. It takes much discipline not to spend cash just because you have it. Businesses are generally being careful. No one wants to jump into a comptetive situation when the other guy has $5 Billion available for capacity expansion. Businesses have learned that you make your money by running existing plants flat out,until you are forced to expand. International free trade has curtailed businesses from jumping too quickly. Increasing capacity reduces profit margins. Profits have surprised analysist for the past two years or better. Not withstanding the hurricane effects, I expect profits to continue to surprise on the upside. Ironically, the local gas stations are feeling the squeeze of higher costs and greater elasticity of demand.

Back to the consumer. If the economy does slow, 10 year treasuries may drop to 3.5% or less. The consumer may get one more big chance to refinance his home or to buy a resort home at a low interest rate. The trend is your friend and it remains the trend until it is not the trend anymore. We have been in the middle of a major real estate boom. A US baby boomer turns 50 every 7.5 seconds. Now don't tell me, all the baby boomers have purchased second homes. Don't tell me the consumer is all done. Peak earnings and spending have always occured between the ages of 47 and 59 and there are currently 79 million Americans of those ages. In many cases, other developed nations had an even greater baby boom.

The laments about consumers being head over heels in debt has been sung all of my life. In fact, quite a bit longer than my life. Read the writings of John Adams. He could not believe the spending habits of the young families in his day. Better still, read Lamentations, written maybe 2,700 years ago.

It is a fact of life that most families spend what they make. When interest rates are low, they can buy substantially more real estate for the same payment. The good news is that consumers who spend on homes and second homes will tighten their belts as necessary to make the payments. Defaults have historically been low.

The net worth of Americans has never been higher. Americans are more leveraged than ever before but there is a difference. The consumer who spends $900 on rent each month and has no equity is a different consumer than the one who spends $1,200 on mortage and taxes but has $30,000 equity. The net worth of Americans now exceeds 50 Trillion Dollars (my memory does not hold the exact number so I may have missed by a few trillion one way or the other).

If industrial capacity were out the roof or if worker shortages were common place, I might be worried about a slow down. As it is, the increases in short-rates by the FOMC have served to "export" inflation to our global trading partners. Indonesians face oil increases of at least 50%! Americans do not know how good life is!

Price gouging is a joke. American businesses work off low gross margins because we are the most efficent in the world. Free enterprise brings tighter margins not gouging. Shortages do cause hyper inflation. However, when allowed to work, the market replaces shortages.

The American consumer needs to be given a little more credit. On balance, the American consumer shops for and gets a good deal. More on this consistent picture of improvement:
Consumer Spending
Skeptical Speculator


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