The US consumer is credited with the responsibility for approximately 70% of the GDP. The GDP is currently measured at PPP $13.85 Trillion. This means that the consumer is responsible for some PPP $9.7 Trillion.
The “average” consumer has PPP of $46,000 per capita.
Is the consumer in trouble? And if the answer is yes, what could be the consequences?
Let’s start with the personal “Savings Rate”
We can see that the savings rate already very low at an average of 2% of disposable income has actually gone negative. This means that debt will have increased as expenditure can no longer be supported by income.
Why might this have happened? Let’s look at some data.
As can be easily discerned from the data, earnings for the average American have fallen. Net Worth for the average American has fallen.
This phenomenon started around the time of the start of the 2000 secular bear market. The ownership of stocks peaked in the huge secular bull market of 1982-2000. The stock market again, like it did in the 1924-1929 bull market, became the province of the average American. When stocks crashed, a huge amount of net worth within 401 savings etc was destroyed.
This prompted Greenspan to keep interest rates artificially low, driving an increase in Real Estate price appreciation, in an effort to reflate the average Americans net worth, and again drive consumer spending.
Where did this borrowing primarily occur?
The consequences are serious. First, the net wealth that had potentially accrued via rising Real Estate values has been extracted from the house and spent. Thus, the holder of the mortgage has in effect cashed out of the house, and should debt payments become prohibitive, or the wage earner[s] lose employment, defaults become far more likely.
Second, there is only limited sources of credit remaining. Credit Cards. The increase in credit card debt is currently showing escalating levels.
This must be pretty close to the end. Once all available sources of earnings, savings, equity withdrawal, credit cards are exhausted, where can you go? Can you still continue to spend? Obviously the answer is no. Thus, corporate profits must fall.
Corporate profits nosedived during the last recession.
As can be seen from the data.
This of course is very serious, as, businesses that are not making money must cut expenses as quickly as possible. Fixed costs, in the form of Plant, Property and Equipment are sticky and cannot be cut quickly, if at all.
An expense that can be cut is employment. Jobs can be cut quickly. Of course this drives a positive feed-forward cycle. People who are made unemployed cannot and will not spend into the economy, driving further reductions in Corporate profits.
So we have currently a situation where the earning power of the consumer via wages and net worth has fallen. Savings, already anaemic, have fallen into negative territory, and personal debt has risen to make up the shortfall.
As can also be seen, this is starting to fall. This is due to the problems within the mortgage sector, that looks to be getting increasingly worse. Thus it is probably a reasonable conclusion to state that consumer spending will fall. This will be due to; falling loans taken to spend on housing and consumerables as savings are not substantial enough, even if the consumer was willing, to support previous expenditures.
Unemployment will be the key driver moving forward. The wheels are already in motion rolling down the hill. The question becomes, what if anything can be done to prevent, or dilute the potential significant increase in unemployment?
Corporations have wasted huge amounts of money via stock buybacks, at frankly inflated prices. Lets look at some data;
Thus at a critical juncture in the business cycle, corporations have weakened their Balance Sheets immeasurably, heading into potentially the worst recession since the 1930’s. What drove such reckless spending of corporate assets?
Was it inflated Option values, requiring higher stock prices? Was it an attempt to boost EPS by reducing the number of shares? Obviously there was no potential growth prospects moving forward. Why not return the capital via dividends?
Thus we have two major trends in place, that will over a period of time reinforce each other. Falling consumer spending drives lower profitability, drives layoffs, drives lower spending, drives layoffs…
Keynesian economic theory dictates an increase in public sector spending from a position of surplus, the problem of course is that the surpluses of the Clinton administration have long since been squandered, and the US is again running deficits.
