Ominous Signs For Consumer Spending
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In what may be an ominous sign for consumer spending, the latest ABC News/Money magazine consumer Confidence Index dropped to its lowest level in nine years while the one-week decline of six points was equalled or exceeded only five times in the last 17 years. In addition only 24% were positive on the economy, again the lowest level in nine years. The percentage believing that the buying climate was positive sank to a seven-year low while the percent saying that their personal finances were negative equalled the number polled five weeks ago, which was also a seven-year low.
Supporting these signs of consumer malaise, an ABC News/Washington Post poll showed that for the first time, a majority was negative on President Bush’s handling of the US economy. This was a rise of ten points since the announcement of the Administration’s fiscal stimulus plan. We believe that these surveys point to a further slowing of consumer spending growth in the period ahead. The ABC News/Money Magazine Index correlates highly with the more widely followed Conference Board and University of Michigan consumer confidence surveys, which correlate well with consumer spending.
The negative implications of these surveys make a lot of sense to us since household net worth has dropped for three consecutive years, consumer debt is at record highs, savings rates are low, corporate layoffs are continuing at a rapid pace, and jobs are hard to get. Moreover, it is becoming clear that the debt load is starting to hurt. Credit card chargeoffs of bad loans are more than 7% of total debt outstanding while third quarter personal bankruptcy filings jumped 12% from a year earlier. Mortgage delinquencies climbed to over 8% in the sub-prime market and to 11.8% for FHA loans.
Over the past two years consumer spending has been the major factor preventing the economy from falling into a steep recession. Now, however, the increasing debt problems, lower net worth and continuing layoffs indicate that consumers may have used up all their ammunition and are on the verge of reining in spending in order to pay down debt, increase savings, and prevent further diminution of net worth. With corporate capital spending not ready to kick in, we believe that the so-called soft spot in the economy will be with us for some time. This should prove to be a major disappointment to a stock market that is primed for a strong earnings recovery. |
