Is the US Consumer in the Endgame?

Is the US economy about to slow down?

Households’ spending on goods, services and non financial assets were approximately $662 billion more than cash inflows in 2005, a record 7.3% of disposable income.

Chart 1 shows net financial investment, defined as households’ net acquisition of financial assets (stocks, bonds, deposits, etc.) minus the net increase in their liabilities (primarily, their borrowing).

Chart 2 shows that households are now running a larger cash deficit than the federal, state and municipal government deficits combined.

Chart 2

Leverage in the US housing market remains at elevated levels despite rising home values, as shown in Chart 3

Chart 4 shows that households are not doing a very good job of diversifying, as households’ net acquisition of financial assets as a percent of their disposable personal income was 5.7% in 2005 - far below the 1952 through 2005 median value of 10.7%.

In Chart 5, households’ debt is rising at a faster pace than the market value of their assets, hence a record leverage ratio of 18.6% in 2005.

According to David Rosenberg at Merrill Lynch, approximately $2.5 trillion of household debt, or 21% of outstanding household debt will reprice (up) in 2006.

So small wonder eurodollars, having been nervous about the prospect of 5.5% rates by the end of '06, have returned to 5% expected, with the pssibility of cuts mooted for early 2007. Sell those spreads!

With thanks to Paul Kasriel of Northern Trust

STOP PRESS - HOSPITAL STOPS SUPPORTING MCDONALDS

This lovely little item crossed my screen today:

Scottish Hospital Stops Handing Out McDonald's Vouchers LONDON (AP)--

A hospital in Scotland has scrapped a program under which young patients were given vouchers for fast food at McDonald's (MCD) after a legislator complained that the gifts could make "the so-called ticking timebomb of obesity even bigger and more explosive." For eight years, children at Raigmore Hospital in Inverness were given the vouchers for free "Happy Meals" as a reward for being brave during treatment. But National Health Service Highland said Thursday that it had scrapped the offer after the health board had ruled it "totally inappropriate."

"I appreciate that the thoughts behind the scheme were to reward children who are sometimes undergoing painful and lengthy procedures, but there are otherways we can do this," said NHS Highland chairman Garry Coutts. "As soon as it was raised with senior managers and directors it was stopped,and I would like to thank those people who brought it to our attention," he said.

The program was condemned by Dr. Eleanor Scott, Green Party legislator inScotland's parliament, who is a former community paediatrician. "From what I know of this scheme, it sounds like the hospital is feeding the unhealthy eating habits that the health service is battling to stamp out," she said. "I really do think something has gone very badly wrong and this practice ofencouraging children to eat highly-processed food, likely to be high in salt,sugar and fat, should stop immediately. Giving out vouchers for McDonald's will simply make the so-called ticking time-bomb of obesity even bigger and more explosive." A McDonald's spokeswoman said the fast food chain had supported the bravery certificates for a number of years after being approached by the hospital. "The express intention was that this was issued to the parent of the child, who could then remove the voucher, should they wish to do so, leaving the certificate intact," she said. She said the last batch of certificates was issued more than a year ago and that McDonald's hadn't been aware they were still in use. The spokeswoman spoke on condition of anonymity, in keeping with company policy regarding McDonald's statements. (END) Dow Jones Newswires 03-09-06 0828ET Copyright (c) 2006 Dow Jones & Company, Inc.

Well, I'm glad that's sorted. I am sure that stopping the children having vouvhers for free McDonalds will influence their lifestyles and their outlooks hugely. Or perhaps not.

Is the EU ready for higher rates?

As usual, ECB members are speaking from the same script, this time reiterating that signs of growth are strong. I have a nagging feeling they are saying this to provide justification for coming rate hikes, rather than basing it on signs of solid domestic growth. I sympathise; rates a t 2% were clearly too low, and causing their own problems. Even at 2.5% it is not certain that credit is not too cheap, and 2.5% is certainly not a sufficient buffer to allow a sudden easing if the European (or global) economy does run into trouble.

However, for the past few years there has been a quiet battle going on between the ECB and politicians, with the politicos saying low rates were needed to promote growth, and the central bankers saying that politicians needed to tackle structural rigidities in labour markets (i.e. pay and benefits enshrined in union agreements) that prompted manufacturing investment to flow east, to improve competitiveness. Now the ECB is tightening, the politicians have to bite their collective lips, and start reforming. Attempts by major EU companies to reform labour structures without government support appear to be foundering - VW is beginning to backtrack on proposed swingeing job cuts, and the unions are crying foul! as they insist they had an agreement to accept lower pay in return for job security until 2011 (I confess that is how I read the startlingly pragmatic agreement myself). Politicians have been suspiciously quiet, as for those who have the nerve to tackle the decrepit EU social model head-on are unlikely to be re-elected - the Dutch are already electing left-of-centre politicians as reforms are proving too distasteful.

Having marched against Margaret Thatcher as a student in the 80s, I understand the reluctance of those in sinecures to embrace change. It is certainly not an appealing prospect for those who will have to give up considerable benefits, even jobs. But I now understand that stasis is not an option. Its like watching the drinkers in the revolving bar at the top of the New York skyscraper: they stand up, get their bearings on the loo, but by the time they have negotiated the tight-packed tables and got to the static part, the loos are round the other side. In that case the situation is amusing. In the case of European companies such as VW, the situation is not so funny, an at least VW managed to get a dgree of movement from the unions last year.

A few weeks ago I read in the WSJE a perfect example of the structures that need to be dismantled to make Europe competitive again: Belgian dockworkers are paid 60% of the daily rate, by the government, if they don't work. The article interviewed one dockworker who had been partying until the early hours, and thus didn't want to work. Luckily for him, all he had to do was sign up for work to receive the handout (sounds a bit like the EU parliament, but that's another story).

Today there is another story about attempts to reform this area:

EU Drops Port Svcs Reform In Face Of Natl Govt Resistance BRUSSELS (Dow Jones)

The European Commission Wednesday gave up efforts to open one of the most protected European labor markets - ports.

In a statement, the Commission said it withdrew its proposed reform of port services. The European Parliament already had rejected the proposal Jan. 17 and the Commission said several governments "had expressed their reluctance on certain provisions."

Recognizing defeat, the Commission said it would begin considering alternatives later in 2006. The discarded proposal's aim was to bust open cargo-handling monopolies by allowing shipping companies to use their own, cheaper staff, many of whom aren't unionized, to unload cargo instead of being required to hire local unionized labor.

Businesses claim the current situation is unnecessarily costly and forces them to charge more for their goods. It also would have opened up port-authority accounts so European Union officials can monitor for prohibited government subsidies and set time limits on leasing port space.

In advance of the parliamentary vote back in January, dockworkers staged strikes in six countries.

The struggle over ports is reminiscent of another recent fight over labor rules, a proposal by the European Commission to let home contractors and other service providers in E.U. nations work anywhere in the bloc while following the rules and paying the taxes of their home countries. Pressed by Western European fears of an invasion of so-called "Polish plumbers" and other cheap Eastern European labor, French President Jacques Chirac led the opposition to the so-called services directive and succeeded in getting Parliament to water it down. Without change, Europe's business leaders complain the Continent will become less competitive and prices for consumers will remain higher than they should be. Importers and exporters say ports are overcharging for cargo handling, and would welcome the new rules. "Unions are afraid of adapting," says Vincent McGovern of Unice, a Brussels-based lobbying group representing European businesses.

Earlier this year I was touting the European recovery story myself, albeit on the basis that stock markets had underperformed dramatically, and therefore any hint of growth should spark a rally. I appear to have been right about that, but as any recovery will be about reform, streamlining and innovation, this lack of political will does take some shine off the recovery story. In fact, to get back to headline, no, I don't think Europe is ready for higher rates