Brokeback Mountain of Debt
Interesting story from Business Week late Dec05 about the improvement of the US consumer balance sheet in Q3 '05. This sifts the Fed's consumer credit data more thoroughly.
** Contrary to popular opinion, consumers have actually INCREASED rather than drawn down their home equity in the previous quarter, to 57.1% from 55.8%.
** Also, only about 1/4 of the $1.6 trl jump in consumer assets came from improvement in home values. Consumers built wealth in cash and securities.
See the source document from the Fed at: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf
Now, statistics can make things look good (or bad), but, used as they are by self-interest groups to make specific points, they rarely give the whole picture. Sometimes anecdotal evidence gives a clearer picture; methods of data collection - or the data sets themselves - can become obsolete (I love the fact the cost of roasted chestnuts is still in UK CPI data).
Sometimes you have to look for clues on the margin, factors that are not directly relevant to the areas being researched, but will impact in some way. So, despite the Fed's upbeat assessment of debt levels in the US, are there any clues elsewhere that help complete our picture of the direction of the US economy,driven as it is by consumer spending?
My first port of call is, for obvious reasons, the housing market. As ever, I am grateful to Mike Shedlock for highlighting a not insignificant event in one district; the fact that one major US housebuilder, Centex Homes, had a one-off $60K "sale" on the 14th & 15th of January. Being an Englishman, my interpretation of the housing market is perhaps distorted, but the $60K discount applied to new homes which, for the 4-bed variety started at about $350K - so this not an paltry "close the deal" offer - it is designed to shift stock before Centex's competitors do. Clearly we should watch for significant discounting elsewhere, to confirm the trend. Mike's blog can be found at http://globaleconomicanalysis.blogspot.com/.
Why am I making so much out of one company's use of discounting to shift its product? Because the US has relied for growth on the consumer, and the US consumer has - whether the Fed likes it or not - leaned (psychologically at least) on rising house prices to maintain the feel-good factor, which enabled spending. The debate about whether or not the US housing market is cooling, will have a soft landing etc. continues, and is of interest. But, if a string of news bytes suggest the major builders are getting a bit antsy about their outlook, where the rubber hits the road there must be a change in sentiment. That change is in consumer sentiment, I would suggest, and the reason we haven't seen it yet is because the current measures we watch - retail sales, home sales - either have too much lag as backward-looking indicators, or are "massaged" (NB I am not suggesting fraudulent manipulation) to smooth out bits of data that stick out too far. After all, there was clearly an element of this in UK housing data, with one survey showing strong price gains even as the market slowed dramatically. Here's a yearly chart of the US housing data signalling a significant slowdown (click on it to enlarge):
Thus I do not believe that the Fed data above actually tells us anything. As with a lot of things human, it is not the change itself which causes problems, it is the rate of change. Right now I am looking for accelerated competition between housebuilders, just as the automakers offered more and more incentives. Ultimately this can only point to one thing: consumer retrenchment. What impact will this have on the US economy?
I have to say I am not looking at the interest rate curve to price this in yet. I think the imminent retirement of Greenspan/accession of Bernanke puts too many unknowns on the table, so what else can we see that will be impacted by slower consumer spending? My first candidate would be those stocks that rely on active consumers, but actually don't sell them anything - the internet giants such as Google. I am hearing reports that the click-thru advertising, which generates good profits for Google, is costing advertisers more than expected, prompting a question mark over whether it will continue in its current format; if sales decline, it won't, so where are your 100X earnings share valuations for Google then?
From a different angle, I see Konica-Minolta are to withdraw from the digital camera manufacturing business; competition and development costs are cited in the press release, but anecdotal evidence suggests the market for digital cameras in the US has peaked. Does this show that demand for consumer electronics is finite? That constantly churning out new, improved models does engender a kind of fatigue in the buyer after a while? It appears to have done so for Konica-Minolta on the supply side, but is this indicative of broader changes?
Finally,as Donald Rumsfeld might say, there are the known unknowns, viz oil prices. I know Western economies, particulary the more flexible ones, are adept at reshaping themselves to take account of rising energy prices, but what about consumers? Any increase in fuel prices chips away at disposable income, and that will shrink US growth.
To summarise, the Fed appears pretty sanguine about the outlook for the US consumer; on the basis that it cannot really help him/her by cutting rates as disposable income shrinks, I suppose putting on a calm front is about the best it can do. The signs on the margin are not good, with signs of housing market cooling and stock market jitters pointing to lower confidence, and sales of some consumer goods looking a bit tired. Conclusion? It won't take a lot to tip this key part of the US economy over the edge.
** Contrary to popular opinion, consumers have actually INCREASED rather than drawn down their home equity in the previous quarter, to 57.1% from 55.8%.
** Also, only about 1/4 of the $1.6 trl jump in consumer assets came from improvement in home values. Consumers built wealth in cash and securities.
See the source document from the Fed at: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf
Now, statistics can make things look good (or bad), but, used as they are by self-interest groups to make specific points, they rarely give the whole picture. Sometimes anecdotal evidence gives a clearer picture; methods of data collection - or the data sets themselves - can become obsolete (I love the fact the cost of roasted chestnuts is still in UK CPI data).
Sometimes you have to look for clues on the margin, factors that are not directly relevant to the areas being researched, but will impact in some way. So, despite the Fed's upbeat assessment of debt levels in the US, are there any clues elsewhere that help complete our picture of the direction of the US economy,driven as it is by consumer spending?
My first port of call is, for obvious reasons, the housing market. As ever, I am grateful to Mike Shedlock for highlighting a not insignificant event in one district; the fact that one major US housebuilder, Centex Homes, had a one-off $60K "sale" on the 14th & 15th of January. Being an Englishman, my interpretation of the housing market is perhaps distorted, but the $60K discount applied to new homes which, for the 4-bed variety started at about $350K - so this not an paltry "close the deal" offer - it is designed to shift stock before Centex's competitors do. Clearly we should watch for significant discounting elsewhere, to confirm the trend. Mike's blog can be found at http://globaleconomicanalysis.blogspot.com/.
Why am I making so much out of one company's use of discounting to shift its product? Because the US has relied for growth on the consumer, and the US consumer has - whether the Fed likes it or not - leaned (psychologically at least) on rising house prices to maintain the feel-good factor, which enabled spending. The debate about whether or not the US housing market is cooling, will have a soft landing etc. continues, and is of interest. But, if a string of news bytes suggest the major builders are getting a bit antsy about their outlook, where the rubber hits the road there must be a change in sentiment. That change is in consumer sentiment, I would suggest, and the reason we haven't seen it yet is because the current measures we watch - retail sales, home sales - either have too much lag as backward-looking indicators, or are "massaged" (NB I am not suggesting fraudulent manipulation) to smooth out bits of data that stick out too far. After all, there was clearly an element of this in UK housing data, with one survey showing strong price gains even as the market slowed dramatically. Here's a yearly chart of the US housing data signalling a significant slowdown (click on it to enlarge):
Thus I do not believe that the Fed data above actually tells us anything. As with a lot of things human, it is not the change itself which causes problems, it is the rate of change. Right now I am looking for accelerated competition between housebuilders, just as the automakers offered more and more incentives. Ultimately this can only point to one thing: consumer retrenchment. What impact will this have on the US economy?
I have to say I am not looking at the interest rate curve to price this in yet. I think the imminent retirement of Greenspan/accession of Bernanke puts too many unknowns on the table, so what else can we see that will be impacted by slower consumer spending? My first candidate would be those stocks that rely on active consumers, but actually don't sell them anything - the internet giants such as Google. I am hearing reports that the click-thru advertising, which generates good profits for Google, is costing advertisers more than expected, prompting a question mark over whether it will continue in its current format; if sales decline, it won't, so where are your 100X earnings share valuations for Google then?
From a different angle, I see Konica-Minolta are to withdraw from the digital camera manufacturing business; competition and development costs are cited in the press release, but anecdotal evidence suggests the market for digital cameras in the US has peaked. Does this show that demand for consumer electronics is finite? That constantly churning out new, improved models does engender a kind of fatigue in the buyer after a while? It appears to have done so for Konica-Minolta on the supply side, but is this indicative of broader changes?
Finally,as Donald Rumsfeld might say, there are the known unknowns, viz oil prices. I know Western economies, particulary the more flexible ones, are adept at reshaping themselves to take account of rising energy prices, but what about consumers? Any increase in fuel prices chips away at disposable income, and that will shrink US growth.
To summarise, the Fed appears pretty sanguine about the outlook for the US consumer; on the basis that it cannot really help him/her by cutting rates as disposable income shrinks, I suppose putting on a calm front is about the best it can do. The signs on the margin are not good, with signs of housing market cooling and stock market jitters pointing to lower confidence, and sales of some consumer goods looking a bit tired. Conclusion? It won't take a lot to tip this key part of the US economy over the edge.
posted by Jambutty at 11:32 am
0 Comments:
Post a Comment
<< Home