Today’s headlines have us worried. The moment that we have dreaded for more than twenty years finally appears to be upon us. The American consumer has quickly become the frugal American saver.
Consumer spending is the lifeblood of our economy, accounting for 70% of America’s gross domestic product. It is the resiliency of the American consumer that enabled us to quickly recover from the 2000-2002 technology bust and the September 11, 2001 attacks. Now, in 2008, we find ourselves in another economic bust. Will the American consumer ride in to the rescue again? The preliminary evidence suggests the answer to that question is “no.”
As Anne D’Innocenzio writes for the Associated Press, “Many of the nation’s retailers struggled with a sluggish back-to-school season…amid persistent worries about high food and gas prices…. According to a preliminary tally by Thompson Reuters, 12 retailers missed expectations…based on same-store sales, or sales at stores opened at least a year, which are a key indicator of a retailer’s health.” Not surprisingly, the best performers were Wal-Mart and Costco, which as discount stores actually benefit from a more cost-conscious consumer.
In certain sectors of the economy, the story is much worse. General Motors announced that its August sales were down 20% from the year before. Even Toyota, with its legendary quality and efficiency, posted sales that were 9% lower year-over-year.
So what does this mean? Is the consumer just taking a break to catch his breath? Or is this the ominous beginning of a new trend in lower spending and higher saving?
Demographic trends suggest that a real shift is underway. The shocks that sapped the American consumer’s will to spend were the credit crisis and the spike in food and fuel prices of recent years. But these merely had the effect of ushering in a deeper, longer-term trend.
As the Baby Boomers begin to pare down their budgets in preparation for retirement, we do not see a return to the free-spending days of the 1990s and 2000s, regardless of what may happen to food and fuel prices or to the credit markets. Things will stabilize to an extent – for example, GM and Toyota cannot continue to have 20% and 9% year-over-year declines, respectively – but we may never again in our lifetimes see the economic and real estate booms of the 1990s and early 2000s repeated.
Earlier in the year, rising commodity prices and a sliding dollar caused investors to forecast the return of inflation for our future. Those speculations have been reversed with the dollar and some commodities back to late 07 and early 08 lows. Oil pulled back from $147 to $105 and could continue lower to the mid-$80 range. For the past year, the Fed has been increasing money supply and injecting reserves into the banking system. Over the past quarter, M1 has grown a 12% annualized rate.
While these changes are supportive of higher stock prices, home prices in America are falling and still show little evidence of stabilizing. Rising prices, high debt levels, and less access to new credit have already started to crimp consumer spending. Banks, hedge funds, and other financial companies are “deleveraging,” which means that they are selling assets and raising new funds to pay back their existing debts. So despite Federal Reserve attempts to “print money,” credit is being retired as fast as it can be created.
We are at the crest of consumer spending driven by households with teenagers and college students spending their parents’ money. The next several years should be very challenging as the households with a need to spend begins a long-term decline. As such, we must plan our businesses and our portfolios accordingly.
In our recent workshops, we have discussed the changing economy and the factors that should justify a shift in strategy and equity exposure. We believe that timing will occur in late 09 or early 2010.
