BT: Slowdown in spending may hurt US growth (15 Jun 2006)

Caution required when investing in companies depending on US market & electronic exporters.

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Business Times - 15 Jun 2006

Slowdown in spending may hurt US growth

High oil prices, flat real estate market, mounting debt dampen consumers

(WASHINGTON) Another sharp decline in US stock markets on Tuesday fanned fears that consumers, already nervous about a cooling housing market, may abruptly curb their spending and dampen economic growth.

'Any slowdown in consumer spending would cause a significant deceleration in gross domestic product (GDP),' said Drew Matus, senior US financial markets economist at Lehman Brothers in New York. 'People are very much on edge.'

Consumer spending accounts for some 70 per cent of US GDP.

In recent years, soaring home prices and rising stock markets made consumers feel wealthier - a behaviour known as the 'wealth effect'.

'In 2005, an increase in housing wealth added about US$130 billion to consumer spending power,' said Michelle Girard, senior economist at RBS Greenwich Capital in Greenwich, Connecticut.

That housing wealth, coupled with healthy gains in stock markets, encouraged historically low, and recently negative, US savings rates.

But the tables have turned in 2006 as consumers confront high petrol prices, a flat real estate market and mounting debt.

'The consumer is facing a lot of headwinds,' said Mr Matus.

As at Tuesday, the Dow Jones industrial average is down 8.0 per cent from its 2006 peak. The Nasdaq composite index notched an eighth consecutive lower close and has fallen 12.6 per cent over the past eight weeks.

Many global stock indexes, where US investors have been active participants, have suffered even bigger losses recently.

'We are seeing a bit of a wealth loss coupled with a shift in momentum,' said senior economist David Hensley of JP Morgan Chase Securities in New York. 'That could affect confidence and spending.'

Sustained stock market losses, coupled with flat real estate prices, could create a reverse-wealth effect, in which consumers, feeling less wealthy, switch into a defensive mode and save more money to compensate for asset losses. Rising interest rates give consumers more incentive to save.

Mortgage payments are cause for concern among homeowners who took out adjustable rate mortgages (ARMs) back when interest rates were historically low.

The Federal Reserve has steadily raised rates since June 2004, and some homeowners face jumps in their monthly payments when their mortgage rates are reset.

'The consumer is going to get squeezed,' Merrill Lynch chief investment strategist Richard Bernstein said at this week's Reuters Investment Outlook Summit in New York. 'Peoples' standard of living has been falling and they've been desperately trying to keep up,' he said.

Those efforts are reflected in consumers' deteriorating credit conditions, as reported in the Federal Reserve's monthly consumer credit report. The most recent data, for April, showed a 4.5 per cent increase in borrowing on credit cards and revolving debt, the fastest pace in 10 months.

'More and more people are putting debt on their credit cards,' said Bill Hardekopf, CEO of LowCards.com in Birmingham, Alabama. 'The interest rates are just killing people that carry a balance.'

Car-dependent Americans are also getting hammered by petrol prices. According to the government's Energy Information Administration, motorists this week are paying 78 US cents a gallon more for regular unleaded gasoline than they did a year ago.

Economists suspect that consumer spending has waned in the second quarter, although many hope that buying rebounds by year-end. - Reuters

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