Holiday spending raises recession flag: James Saft

by James Saft

LONDON (Reuters) - U.S. consumer spending in the crucial holiday period looks weak, upping the chances that the credit crunch tips the economy into recession.

Americans spent less in stores last week compared to a year ago for the third week running. More of them say they will spend less this year, while fewer say they will spend more.

Little wonder. The seemingly unsinkable American consumer is weighed down by debt, has seen the ATM machine they call home shrink in value and is now finding loans are harder to come by.

With consumer spending accounting for about 70 percent of U.S. gross domestic product, the stakes this Christmas couldn't be higher.

Sales in the week ending December 15 fell 0.4 percent from a year earlier, compared to falls of 2.7 percent and 4.4 percent the two weeks before, ShopperTrak RCT said on Wednesday.

A National Retail Federation survey released on Tuesday found that a third of shoppers intend to spend less this year, up from 29 percent who were cutting back a year ago.

Only 16.4 percent of shoppers plan to spend more this December, down from the 20.4 percent planning an increase last year.

MasterCard data released over the weekend showed sales have slowed steadily since the Thanksgiving weekend.

While shoppers may have been stymied last week by a winter storm, the more likely explanation for the muted December is that gasoline at more than $3 per gallon is combining with the most widespread housing slump in more than a generation to dampen demand.

To understand why the outcome of consumer spending is both important and a likely source of recession you need to understand just how deeply indebted they have become.

U.S. household debt hit $14.2 trillion in the third quarter, or a record 138 percent of household disposable income, up from 113 percent in 2002.

"People don't realize how far expenditure is above income. Each year the consumer needs to increase its debts by the equivalent of 4 percent of GDP just to keep that level of that expenditure (consumption plus investment) the same," said Albert Edwards, global strategist at Societe Generale Cross Asset Research.

"With the current imbalance between spending and income, debt carries on ballooning upward just to keep expenditures the same. If the rate of borrowing falls back a bit, expenditure falls back very sharply."

If this marks a turning point for the consumer debt cycle, the impact will outstrip that of the credit crunch, not to mention providing another push to the self-reinforcing cycle.

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