View On US Consumer

Chris Puplave has a very interesting commentary on the US Consumer: A Bird's Eye View of the U.S. Consumer: 7th Inning Stretch or 9th Inning?

The point that very much worth highlighting is the following issue:

• Seventh Inning Stretch or Ninth Inning?

  The importance of the growth in debt can not be overstated as the fuel for our service and financial economy that supports the U.S. consumption appetite that has grown to 70% of GDP as shown by Figure 1 shown again.

  
  

  Figure 1

  
  

  
  Source: Moody’s Economy.com/BEA, Federal Reserve Board (FRB)

  
  

  When consumer and corporate appetite for more debt contracts a retrenchment in consumer spending and capital investment ensues that leads to a recession. Since1950 there has only been one period when there was a sharp contraction in household debt growth that didn’t lead a recession, and also only one period of a contraction both corporate and consumer debt growth that didn’t lead to a recession -- only one exception in over a half century.

  
  

  The exception with household debt growth without a resulting recession occurred in the middle 1960s. What helped prevent a recession was the corporate sector picking up the slack as corporate debt growth remained in the high single to low double digit rates. When the corporate debt growth rate began to slow, a rebound in consumer debt growth was already underway preventing a recession.

  
  

  In the 84/85 mid-cycle slow down, both consumer and corporate debt growth contracted significantly at the same time without a resulting recession. The likely reason for a recession not resulting was due to the levels from which both dropped and fell. Both fell from the high teens to high single digit rates, still strong growth rates. It was only when rates fell sharply to low digits, or even negative rates in the case of corporate debt growth, when a recession resulted in 1990. When both have contracted to low single digit rates we have had a recession, no exception.

  
  

  As is shown below, household debt growth has contracted sharply, principally due to a drop in mortgage debt as seen in Figure 19. This is likely sending us a recessionary warning as there has only been one exception to contracting household debt growth without a recession as mentioned above (mid 1960s). What is alarming is corporate debt growth looks like it is rolling over and if corporate debt growth and subsequent spending contracts, the alarm bells will be loudly ringing as there has been no exception of the absence of a recession when both fall to low single rates.

  
  

  Figure 21

  
  

  
  Source: Moody’s Economy.com/FRB

  
  

  The YOY rate of change is a relative number expressed in percentage terms. The relative trends in consumer and corporate debt growth is alarming, but the absolute debt growth in corporate and consumer debt growth is downright frightening. Take a look.

  
  

  Figure 22

  
  

  
  Source: Moody’s Economy.com/FRB

  
  

Claire Barnes of Apollo Management carried the following note on her website.

• 12 Feb 07:The US 'housing finance breakdown: a saga of corruption, stupidity, and government complicity' is now being tracked by The Mortgage Lender Implode-o-Meter. The Apollo Asia Fund owns no HSBC shares.

And oh, the US Market had another record shattering day again.

http://money.cnn.com/2007/02/14/markets/markets_0530/index.htm?postversion=2007021418

• Record-shattering day on Wall Street
  Dow industrials close at highest point ever as do utilities and transportation averages; S&P 500 hits 6-1/2-year high.
  By Jessica Dickler and Alexandra Twin, CNNMoney.com staff writers
  February 14 2007: 6:16 PM EST
  NEW YORK (CNNMoney.com) -- Stocks rallied across the board Wednesday, pushing the Dow Jones industrial average to a new all-time record, after investors cheered comments from Federal Reserve Chairman Ben Bernanke.
  
  The Dow (up 87.01 to 12,741.86, Charts) jumped 0.7 percent to close at a record high, taking out its previous record from two weeks ago. The blue-chip barometer also hit a record trading high during the session.