U.S. Consumer Spending May Slump in a
`Cold, Dark' Winter
Bloomberg
Will Edwards & Steve Matthews
October 17, 2005
Oct. 17 (Bloomberg) -- U.S. consumers, and the businesses that depend on
them, are bracing for what Lehman Brothers Inc. economists call a "cold, dark
and expensive" winter.
A growing number of Wall Street forecasters, including those at Goldman,
Sachs & Co. and Merrill Lynch & Co., are pulling back on estimates for
consumer spending. They cite a convergence of rising energy prices, falling
real wages and new rules requiring bigger credit-card payments that threaten to
increase delinquencies at a time when a record number of borrowers are already
behind on their bills.
"We are hitting the consumer with headwinds that we have not witnessed on
record," says Andrew Pyle, senior economist with Scotia Capital in Toronto.
Goldman, Sachs predicts a 1.5 percent annual rate of consumer spending over
the next two quarters, half the pace of the previous two years; Merrill Lynch
& Co. set its fourth- quarter estimate closer to 1 percent. "It's very
likely consumer spending will slow down significantly in coming months," says
Ethan Harris, Lehman's chief U.S. economist.
A slowdown threatens not only the U.S. economy -- consumer spending accounts
for two-thirds of gross domestic product --but the world's as well: The U.S. is
the destination for 18 percent of the world's goods.
Energy prices are the catalyst, though not the only reason, for the
anticipated slowdown. The price of crude oil, gasoline and natural gas all
reached records after Hurricane Katrina slammed into the Gulf Coast, an energy
hub; Lehman estimates consumers will pay $25 billion more this season to heat
homes. In an Oct. 14 report entitled "Cold, Dark and Expensive," the firm said
higher energy prices may cut U.S. gross domestic product growth by half a
percentage point in the next two quarters.
The True Test
The true test for the consumer may come in few months, when heating bills
arrive. Some economists say home-equity loans, which are still bolstering
Americans' ability to spend, will help cushion the blow; they also take heart
from the latest reports on post-hurricane spending. The Commerce Department
said Oct. 14 that retail sales rose 0.2 percent in September and by 1.1
percent, the most since April, when auto sales were excluded.
"Despite high energy prices, consumer spending will hold up relatively
well," says Jason Schenker, economist at Charlotte, North Carolina-based
Wachovia Corp., which forecasts consumer spending increases of 2 percent in the
first half of next year, rising to 2.7 percent by the fourth quarter of 2006.
"Consumer behavior is not changing a lot."
Feeling the Pain
Consumers are certainly beginning to feel some pain: consumer prices rose
last month by 1.2 percent, the most in 25 years, as energy costs posted the
biggest jump on record, the Labor Department said Oct. 14.
Merchants including Richmond, Minnesota-based Target Corp., the nation's
second-largest discount retailer, and sporting- goods retailer Cabela's Inc.
are blaming rising energy prices for hurting sales. On the same day as the
inflation report, Sidney, Nebraska-based Cabela's said sales at its stores that
have been open at least 15 months may drop as much as 9 percent.
The two consumer categories among 10 subgroups in the Standard & Poor's
500 Stock index have each posted losses in the past six months even as the
overall index rose 3.9 percent.
Falling Wages
The surge in energy prices is contributing to a decline in Americans' wages
once inflation is taken into account. The Labor Department said Oct. 14 that
so-called real wages fell 1.2 percent last month, the biggest drop since
January 1996, and that the 12-month decline was the biggest since March
1991.
"There is no question that many households are suffering declines in real
incomes," William Poole, president of the Federal Reserve Bank of St. Louis,
said at a speech in Washington later that day.
The decline erodes the purchasing power of American consumers, who Morgan
Stanley says have accounted for 71 percent of gross domestic product since
2002, up from an average 67 percent the previous 25 years.
"Consumers have stagnant real wages and they are getting hit with the shocks
of higher energy prices," says Stephen Roach, the firm's chief global economist
in New York. "This is not a good combination for the overstretched
consumer."
Delinquent Consumers
Chad and Jennifer Fielding are among those "overstretched" consumers and
illustrate another of the risks that may contribute to slower consumer spending
this winter.
With energy prices soaring, an increasing number of Americans are falling
behind on credit-card payments; at the same time, new rules taking effect by
year-end mean most consumers will be required to pay 4 percent of their
outstanding balances each month, up from about 2 percent now. That will boost
payments as much as $2,400 a year for borrowers with $10,000 in debt.
The Fieldings filed for bankruptcy protection Oct. 2 after their credit-card
debt ballooned to $30,000 over a decade of spending. A new law taking effect
today will make it harder for consumers to erase debt through bankruptcy.
"You hit a breaking point, and something had to be done," says Chad, 31, an
administrator at Henderson State University in Arkadelphia, Arkansas. Jennifer,
32, a teacher, says the couple paid the $900-a-month minimum on cards and "the
balance never went down."
Credit Cards
The share of delinquent credit-card accounts rose to 4.81 percent during
April to June from 4.76 percent in the prior three months, the American Bankers
Association says. Consumers spent 13.55 percent of their disposable incomes on
debt service in the second quarter, an all-time high, the Federal Reserve
says.
Carl Steidtmann, chief economist at Deloitte Research in New York says
delinquencies may approach 6 percent this quarter as the higher minimum
payments take effect. Some companies already may be feeling the pinch.
Citigroup Inc., the largest U.S. financial services company, later today may
report its first drop in profit in five quarters because of rising credit- card
defaults, based on average economist forecasts in a Thomson Financial
survey.
Fed policy makers say overextended consumers may be a source of weakness for
the economy.
"There will be some pressures on households, and that will be particularly
true if we have a cold winter and natural-gas prices go up even further," Poole
said in an Oct. 4 press briefing. Bankruptcy filings rose ahead of the new law,
which may be giving an incentive for filings, he said.
Rising energy prices will prompt consumers to "pull back on spending,"
Thomas Hoenig, Poole's counterpart at the Kansas City Fed, said Oct. 5.
"Consumer debt has risen," he said, and the increase in "is significant."
To contact the reporters on this story:
Steve Matthews in Atlanta at smatthews@Bloomberg.net;
Will Edwards in Charlotte at wiedwards@bloomberg.net.
Last Updated: October 17, 2005 00:15 EDT
|