December 12, 2008 / 9:55 PM / 11 years ago

Consumer spending to ebb more than investors see

NEW YORK (Reuters) - Consumer consumption, long an engine of the U.S. economy, is poised to contract the most since World War Two and may impede a fast recovery that many equity investors are counting on.

U.S. stocks have rallied about 17 percent since sliding to 11-year lows in late November on the belief the worst of the deepest post-war bear market on record may be over.

But unlike every recession since the Depression, a boost in consumer spending — primed by a lowering of interest rates — will not lead to a sharp recovery, several investors at this week’s Reuters Investment Outlook Summit 2009 said.

After a buying binge that pushed consumer spending to five times the rate of economic growth for this decade, the American consumer is tapped out and needs to shore up finances.

“I don’t see fast growth in the United States for several years,” said John Taylor, chairman and chief investment officer of hedge fund FX Concepts Inc, which oversees $14 billion in assets.

“People need to get their personal finances back in order,” he said.

The United States is in the early stages of a structural shift in which slower consumer spending will dramatically reduce its impact on gross domestic product, Taylor said.

“We have to take the consumption sector from 71 to 72 percent (of GDP) to 67 to 68 percent,” he said.

Morgan Stanley estimates the slowdown in real consumption will be a negative 1.6 percent in the 12 months ended June 30, 2009, a post-World War Two record. World growth, at 1.7 percent, will be the weakest rate since 1991, the bank said.

Growth in consumer spending over the next several years will be about 1 to 1 1/2 percentage points less than the 3.5 percent clip during the decade ending 2007, it said.

That slowdown could lead to a slow and long recovery, and change the outlook for capital markets in the years to come, especially retail and other consumer-oriented securities.

Investors do not appreciate yet how long the downturn in the U.S. retail industry may last, said Shawn Kravetz, president of Boston-based hedge fund Esplanade Capital LLC.

“We don’t think that people have fully factored in this general level of malignancy going on for a year, 18 months, maybe two years,” he said at the summit.

The consumer recession will be so “deep and brutal” the U.S. retail industry could lose one out of every 10 stores in coming years, Kravetz said.

Consumers, businesses and investors all are rushing to reduce risk amid a broad deleveraging, said Mohamed El-Erian, co-chief of fixed-income powerhouse Pacific Investment Management Co in Newport Beach, California.

Investors pushing a rally in equity markets after stocks slumped in November to lows last seen in 1997 may be too optimistic as more bottoms are likely, El-Erian said.

“It puzzles me that people feel confident to declare the bottom,” said El-Erian, famous for resisting the herd after he bet in 2002 that president-elect Luiz Inacio Lula da Silva would not lead Brazil into a bond default as Argentina had.

“What we’re looking at is a very bumpy journey that will continue well into 2009. We’re looking at multiple bottoms.”

The level of debt to gross domestic product is running at rates last seen during the depths of the Great Depression, said Tom Atteberry, a partner and fixed-income manager at First Pacific Advisors of Los Angeles.

Consumer spending has ramped up this decade to almost 72 percent of GDP from about 66 percent at the beginning of the decade, he said.

As a percentage of GDP, private debt has soared to close to 250 percent last year from about 10 percent in 1952, according to Ned Davis Research.

After paying food, energy, debt service, health care and taxes, the American consumer has little left, Atteberry said.

“This person is starting to get very, very stressed, and their ability to pay off is virtually impossible,” he said.

“There are only two ways to repair the balance sheet; sell the asset and pay down the debt, or you’re going to spend less than you earn. There is no third choice,” Atteberry said.

“We see this recession lasting into 2010.”

Reporting by Herbert Lash, Editing by Chizu Nomiyama

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