December 20, 2007 / 2:55 PM / 10 years ago

Holiday spending raises recession flag: 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.

Shoppers look at electronics in a store in New York's Time's Square November 23, 2007. U.S. consumer spending in the crucial holiday period looks weak, upping the chances that the credit crunch tips the economy into recession. REUTERS/Brendan McDermid

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.


But why now? Americans have kept on spending through other tough periods, and indeed betting against them has historically been a losing proposition.

What is key now is that the main asset against which Americans borrow has declined in value at the same time that borrowing has become much more difficult.

The S&P/Case-Shiller national index is down 4.5 percent for the year to November, and many analysts are predicting bigger falls in the coming year. American’s equity in their own houses declined by $128 billion in the third quarter, according to Federal Reserve data.

And banks are less willing lend against that dwindling equity. Home equity lines of credit and other mortgage loans are now harder to get and more expensive, due in part to a higher level or perceived risk by banks but also because of the effective shutdown of the global securitized debt markets.

With few other options for ready cash, a growing number of Americans are breaking into their retirement savings, according to a survey of chief financial officers by Duke University and CFO Magazine.

It showed that nearly a fifth of CFOs have seen an increase in those seeking “hardship” access to their retirement accounts, with 45 percent of those using the money to make mortgage payments.

Incredibly, 40 percent sought to break their retirement piggybank to allow “non-emergency” spending.

Given that these withdrawals incur a ten percent penalty tax it’s not “something people do lightly,” said John Graham, a finance professor at Duke.

With this as a backdrop the soggy holiday sales figures make more sense.

Retailers in the U.S. are hoping that a last minute rush this weekend saves the day.

If consumers do hang in there the U.S. may escape recession, but if not it does look likely.

“I’d be very surprised if we were not in recession by the first half of next year,” said Edwards of SocGen.

“In fact, I’d be astounded.”

James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. email:

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