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The consumption recession continues with today’s release of Consumer Credit data for August by the Federal Reserve which showed a $12 billion dollar contraction for the month – steeper than forecast and the 7th consecutive decline.

Consumer spending is a function of several things, the largest of which is employment.  With federal unemployment expected to thrust through 10 percent in 2009, the elimination of jobs in and of itself will continue to mount pressure on people spending money that they do not yet have.

The consumer propensity to spend over the past decade was fueled by plentiful consumer credit.   U.S. household debt as a percentage of annual disposable personal income was at its highest rate of 127% at the end of 2007 versus 77% in 1990 and, though declining, remains at elevated levels today.

In 1981, U.S. private debt was 123% of GDP; by the third quarter of 2008, it was 290%. The credit crisis and the recessions, coupled with an unprecedented amount of consumer debt, have led to all-time high credit card delinquencies.   High delinquency rates, in the face of increasing unemployment, means that credit cards will not be repaid which eliminates capacity to spend and makes less credit available to consumers.  With credit contracting, consumers will likely pull back their spending and save more or pay down debt.

The bottom line is that the continuing economic uncertainty, continued job losses and a contraction in credit will alter changes in consumers’ spending behavior for some time.   Until we start to see more convincing signs of stability in employment, home value appreciation, and bank credit expanding, meaningful economic recovery remains elusive.

Howard Penney

Managing Director

Andrew Barber

Director

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