We flying the first class
Up in the sky
Livin' the life
In the fast lane
And I won't change
Many people who were used to preboarding in previous years will be
saddled with the coach crowd for much of 2009 - that is, assuming
that "important" business meeting in Phoenix is truly "important"
at all. To say consumption will be reduced this year misses the
point that we may be at the tipping point of a change in American
Since 1980, according to data from the Department of Commerce and
the Bureau of Economic Analysis, consumption has grown 7.4 percent
faster than income. The difference, it can safely be assumed, has
been financed by someone, somewhere. Now that benevolent uncle may
be calling in the loans - or at least refusing to renew on
The 1980's are widely viewed as the decade of excess; however, can
we truly say our spending habits have been tempered since then?
Certainly, the productivity miracle of the 90's allowed consumers
to purchase more and higher quality items, but that does not excuse
the outsized spending habits versus income. In a very real economic
sense, America's chickens are coming home to roost.
As Debi Hanson, one of our portfolio managers, wrote in January's Observation Deck
, "Contrary to
holiday ads screaming, buy, buy, buy... the current sentiment is
clearly bye-bye buy." This year's holiday discounts were much more
aggressive than previous years'. In many cases, stores slashed
prices upwards of 70 percent, but even those incredible bargains
did not bring out the shoppers. Retail sales figures are now down
for the last six months in a row and are down 10.6 percent from
their peak last summer.
So, those around the globe who have complained for years about the
"arrogant American" and his "filthy spending habits" may now get
their wish as the U.S. consumer takes his foot off the pedal.
Unfortunately for all of us, this will have global repercussions.
The world exports approximately $600 billion more in goods and
services to the U.S. than they import per year. Who will now
purchase the next blockbuster Ronco-like product?
It's possible this recession will turn quickly and easy credit will
resume, allowing the American consumer to continue to drive the
world economy. But that may not be the best of scenarios. Bubbles
pop louder and harder the larger they are allowed to grow, and the
growing gap between consumption and income on the household income
statements will have to be reconciled at some point.
On the other hand, we may have just heard the final click on the
consumption roller-coaster. Certainly, there are many consumers who
have thrown their hands into the air in desperation. Key Developments
Housing starts continued their downtrend that began in January
2006, falling 15.5 percent in December to an annualized rate of
550,000. This is the lowest pace since the Census Bureau began
keeping such records in 1959. It can safely be assumed that the
pace of new home construction is well below the pace of home
destruction (due to fire, flood, etc.), which has been estimated in
the 750,000 to 1 million range.
Initial unemployment claims for the week ended January 17 rose to
589,000, tying this cycle's peak. For the first half of 2008,
nonfarm payrolls decreased an average of 77,000 per month. In
December, California's nonfarm payroll decreased 78,200. Job losses
continue to increase across the country and their effects on the
remainder of the economy will become apparent in the first and
second quarters of 2009.