State of The Consumer II: Numbers Don’t Lie

By my math, the year/year deficit in consumer spending in 2009 rivals the size of the US apparel/footwear industry in its entirety. Here’s how I get there…

Seems rough out there for the consumer, huh? I’m really sorry to say this, but you ain’t seen nothin’ yet. I know this seems like my typical ‘doom and gloom, margins are going away’ rant. But I spent the better part of this weekend going through the math. Many people don’t realize this, but real consumer spending is actually trending up yy. My model suggests that discretionary spending will finally turn negative in 1Q09. This would be the first time in 66 quarters consumer spending will have gone negative.

I think we’re also looking at discretionary spending down about $170bn next year. The icing on the cake is that the yy delta (prior year’s increase less current year’s decrease) is tracking close to $245bn. As a frame of reference the entire apparel and footwear retail industry is about $300bn. I have a one word answer for this. BANKRUPTCY. I outlined my list of bankruptcy candidates several times over the past few months. But that list is growing. I’ll be back with more meat on the bone there shortly.

I realize that I’m not the only person that has a detailed consumer model. So let’s take a look at some key assumptions, and you can come up with how you’d tweak it one way or another.

1. Gross personal income reflects a 7% unemployment rate, which takes total income growth down by 400-500bp sequentially over 3 quarters.

2. Zero change to the personal tax rate, which averages at 12% across the US.

3. Sub-1% savings rates is unsustainable given negative wealth effect from state of housing and equity markets. (Check out my prior post).

4. Personal interest payments head higher by 0.1% per quarter due to higher debt levels and interest rates.

5. Oil stays at $80, and gas/distillate stay at current levels. YY comps get easier in 4Q.

6. We went through all consumption categories we deem ‘Essential’ such as food, medical, housing, etc… and input growth forecasts based on my fellow analysts’ assumptions.

Tweaks to the many assumptions in our model would alter the $245bn yy delta in spending (2.5% of consumer’s wallets). But even if the geniuses at the Treasury, Fed or in the new political regime find a way to cut it in half, that would still represent 40% of the apparel/footwear retail space.