Wall Street still overestimating the American consumer

Despite every effort from Washington, the American consumer continues to repair his/her balance sheet. The federal government has repeatedly gone back to what it knows and teased us with goodies (like cash4klunkers) in an effort to get us to spend money we don't have on things we don't need, but those days appear to be over.

(Bloomberg) -- U.S. consumer credit fell in September for an eighth straight month, the longest series of declines on record, as thousands of Americans lost their jobs and banks tightened access to loans.
Borrowing fell more than economists predicted, declining by $14.8 billion, or 7.2 percent at an annual rate, to $2.46 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $9.86 billion in August, less than previously estimated. The consecutive declines were the most since records began in 1943.

The optimists, who are already predicting that happy days are here again, fail to mention how the economy will rebound without the American consumer. Consumer spending is 70% of the economy. So how will the economy grow when the consumer is paying down debt rather than buying junk at the mall?

A good way of measuring of how Wall Street has completely underestimated this trend has been in the consumer credit numbers.

Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09
Forecast Consumer Credit 2.0B 0.0B -4.2B -4.2B -2.2B -4.2B -6.0B -9.8B -4.0B -3.8B -9.9B -9.9B
Actual Consumer Credit -3.5B -7.9B -6.6B 1.8B -7.5B -11.1B -15.7B -3.2B -10.3B -21.6B -12.0B -14.8B

It isn't just a matter of the so-called experts on Wall Street missing the forecasts in all 12 months of the past year by a large margin. The real trick is that they've missed 10 of those 12 months in the same way - by overestimating the spending ability of the American consumer. After a certain number of misses in the same direction it's no longer a surprise - it's a bias.

They keep expecting the American consumer to start spending again, or at least spend more than he/she is going to, no matter what the job market like look like. Wall Street seems to have missed the biggest and most important lesson of the last bubble - housing supported the American consumer. Not paychecks.

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With the implosion of the housing bubble, the American consumer can no longer use their homes as ATM machines. With the implosion of the credit bubble, the American consumer can no longer tap easy credit from the banks.

It almost makes sense why the stock market seems to want to go higher, if you think the American consumer is just about to start spending again. At some point Wall Street is going to wake up to the fact that the game has changed and their premise is wrong. The American consumer isn't going to start spending again until either the jobs return, or their balance sheets are repaired. Neither of those things are going to happen anytime soon.
When Wall Street figures this out the stock market will correct very sharply. This realization is most likely to happen when the Christmas sales numbers begin to come in.

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I know this topic has already been addressed

but not with the slant I'm giving it.

as far as I'm concerned

unless we have a "repeat" de facto, I don't see any problem with multiple bloggers covering similar topics at all.

I know I personally cannot analyze, dig out graphs, stats on every single EI adequately....we're a group effort!

Which leads me to something else. I think we need to push hard, damn hard for solutions we know would work.

We have such shit coming from this administration and Congress and then we have analysis....but in terms of hard, concrete, grab your hands around 'em and push 'em bills, very specific policy, actual legislation we know is great, it's really hard to find.

Everybody here is pretty astute and I'm figuring we can handle writing up solutions.


End the Wars
Cut funding for the military empire, Homeland Insecurity, and black budgets
Apply these savings to a National Health Care system
Investigate and prosecute ALL those responsible for the fraudulent Wall Street fiasco from brokers to CEOs
Remove all Government support of those institutions and allow them to fail
Reorganize these institutions in bankruptcy without their former owners and executives into smaller entities
Regulate the financial markets to exclude speculation and provide transparency of transactions
Rescind the Bush tax cuts including the “middle class” tax cuts
Adjust and index the AMT
Lower tax rates for incomes under $125,000 single/$250,000 joint
Remove the preferential treatment of hedge fund earnings
Lower the tax rate on dividends by 50% of their marginal rate only from companies that pay U.S. income taxes; apply a sliding scale
Lower the tax rate on long term capital gains by 50% of their marginal rate
Levy the employee portion of Social Security and Medicare taxes on unearned incomes
Remove the ceiling on Social Security and Medicare taxes
Provide small investors an exemption of $10,000 single/$20,000 joint on unearned income for SS and Medicare taxes
Separate the Social Security budget from the Federal budget; make a full accounting of all “borrowed” funds with interest
Change the itemized deductions for home ownership to a tax credit of 25% of interest and taxes with a $2,000 cap
Tax natural gas and coal at a rate to make wind and solar energy cost comparable for electricity generation and commercial heating
Provide Government backed zero interest loans for large scale alternative energy projects
Place a surtax on motor fuels of $2 per gallon sequestering the proceeds from Congress
Exclude natural gas and bio fuels from the surtax if used as transportation fuels replacing imported oil
Apply these proceeds to credits/subsidies for individuals and businesses for small scale point of use alternative energy investments and vehicle investments
Require nationwide net metering with excess electricity sold back at fair market rates
Provide credits to purchase or convert vehicles to natural gas
Provide credits to purchase electric or high mileage plug in hybrids
Tax imported goods based on carbon supplied energy inputs
Decriminalize most drugs excluding amphetamines
Tax marihuana like alcohol; require a yearly license to grow your own

Just Curious

If you are going to decriminalize, why "except amphetamines"? You are going to decrim coke but not crank? There is speed and then there is speed. Meth is one of the most destructive drugs, but many a grad student has been able to cope with heavy assignments "with a little help from his friends." I can think of medical reasons not to ease access to amphetamines, but the same applies to coke. Are you going to include smack among the "okay" drugs? Why not advocate opium dens? Nobody ever got HIV from smoking opium. Sorry to focus on this particular issue, but you see how murky this "let's just make it legal" argument can get. On medical MJ, the cat is out of the bag. Maybe our GDP will see an uptick (in some states) as it gets further out.
Frank T.

Frank T.

Speed Kills

If you're not a criminal before abusing meth, you will be after. Just ask someone who had to clean the brains out of the louvered doors after two strung out speed freaks got into an argument over the take from an armed robbery and one shot the other through the head.

It's a new ball game.

High unemployment with high household debt levels it's very hard to see how consumer spending will drive a recovery.

And add to that the fact that foreclosures are not stopping and negative equity is still a problem it's hard to see how consumer confidence picks up enough to buy.

As for the stock market - it's the wall of liquidity searching for a place to invest.

RebelCapitalist.com - Financial Information for the Rest of Us.

Consumer Credit

Here a couple of graphs provided by Karl Denniger that further support your position.

First, the a shorter historical view:

And then, a longer range view:

His comments are right on as well.

We are a credit-based system, as are all modern monetary systems. No meaningful economic recovery can or will occur until the consumer has purged his balance sheet of the inappropriate debt he has and is once again able to earn and borrow.

If we supposedly exited the recession on or before September, it sure isn't apparent in this report. You can put a fork in that line of garbage - it's done.

As many commenters here have so frequently stated, we are playing a game of "extend and pretend". But the "engine of growth", the American consumer (a.k.a., the average hard working, god fearing citizen) is the only recognizable victim of the Great Government and Wall Street Fraud of the 21st Century.

Japan, Japan, Japan, Japan,

Japan, Japan, Japan, Japan, and Japan.

The economy will never recover as long as the population is overleveraged. Wages need to go up or debt levels need to go down (a lot). Won't happen any other way.

I would go with both simultaneously

So sayeth you, Jean-Baptiste Say, Ravi Batra, and every real economist with a functioning brain!


Don't forget that, on top of everything else, credit card companies are jacking up interest rates. Once I pay the new minimums, there's a lot less to spend. If all these corporations are borrowing money at near zero, why am I paying 30%? These fools are just driving more nails into the coffin.


And they are jacking up interest rates as Congress is attempting to pass a credit rate limitation bill, so the sociopathic corporate america jumps the gun on the matter!

It's all about disassembling the American economy.

American Consumers are Rational After all

I guess this just means that American Consumers are rational after all, unlike bankers, so there is hope after all! Who can blame the consumers for repairing their balance sheet when unemployment is double digit??