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Five Things You Need to Know: Consumer Spending Now "Slowing at Every Level"


The real thorn in the side of consumer spending is new evidence suggesting even the wealthy are scaling back spending.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Consumer Spending Now "Slowing at Every Level"

First up today is an article in this morning's New York Times making the case that consumer spending "has begun to slow sharply at every level of the American economy, from the working class to the wealthy."

  • "A raft of consumer companies - high-end stores like Nordstrom (JWN) and Tiffany (TIF), and middle-of-the-road ones like Target (TGT) and J. C. Penney (JCP) - reported a pronounced slowdown in growth last month, and in several cases an outright drop in business," the Times reported.
  • But the real thorn in the side of consumer spending (which makes up nearly three-quarters of the U.S. economy) is new evidence suggesting even the wealthy are scaling back spending.
  • American Express (AXP) on Friday said spending by its 52 million cardholders fell 3%, the first slowdown since the recession of 2001.
  • Capital One (COF) reported a similar slowdown in spending, and uptick in loss rates, but the big difference is in demographics; Amex cardholders are among a wealthier, more affluent group of consumers.
  • But we knew this already.
  • The Times article caught our eye for a different reason.
  • "Everything just feels more expensive to me now," travel consultant Gia Trumpler told the Times.
  • Sure enough, luxury and expense are economic perceptions, not economic realities.
  • The mistake over the past five years has not been one of "underestimating consumer resilience," but of underestimating the psychology that drives it.
  • The mistake over the next five years will likely be one of underestimating the depth of psychological change driving the consumer to cut back.

2. Yet, General Motors Undaunted

General Motors (GM) Chief Financial Officer Fritz Henderson said last night that although GMAC auto loan delinquencies were up in the third quarter, this should not be interpreted as a sign that the issues affecting subprime mortgages are infecting auto financing.

  • GMAC's auto loan delinquencies rose from 2.4% to 2.6% year-over-year for the third quarter.
  • "Yes they've ticked up, but viewed in any sort of historical way, they were still at quite acceptable levels," Henderson said, according to Associated Press.
  • GMAC has more than $100 billion in its auto loan portfolio worldwide, so the loans "are something we need to watch, but not at all like what we've seen in mortgages," Henderson said, according to AP.
  • Of course, no one from General Motors has any basis for making the claim that issues affecting subprime mortgages will not infect auto financing, especially subprime auto financing.
  • The reality is it's only a matter of time.
  • Two researchers, one from the Federal Reserve and another from the University of Texas, looked at the question, What Drives Default and Prepayment on Subprime Auto Loans?, nearly four years ago.
  • Turns out the answer is not exactly complex.
  • The study found that defaults on subprime auto loans are driven largely by shocks to household liquidity.
  • As for GMAC specifically, subprime auto loans are a relatively small part of the company's loan portfolio.
  • Now it should be noted that, unlike other lenders, GMAC keeps most of its auto loans on its books rather than reselling them.
  • Then again, considering GMAC's small percentage of subprime loans, doesn't that make the uptick in delinquencies even more worrisome?

3. China, They're Just Like Us!

Turns out Citigroup's (C) plans to raise much-needed capital by selling a $2 billion stake to China Development Bank may not be the slam dunk everyone thought.

  • According to the Wall Street Journal, over the weekend opposition to the deal surfaced from within China's government.
  • Why the cold feet?
  • Apparently, because China may be more like us than we thought, and prefer that their investments.... wait for it.... make money.
  • The story echoes a piece by James Fallows in this month's The Atlantic, "The $1.4 Trillion Question," that notes a growing backlash among Chinese after a $3 billion investment in Blackstone (BX) that has lost more than a third of its value.
  • (That was $3 billion of China's national savings, by the way.)
  • As Fallows notes, what China's huge trade surplus, estimated to be about $1.4 trillion, is that, "In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People's Republic of China."

4. Meanwhile, Is China's Growth Slowing?

After raising interest rates six times over the past year, restricting credit, freezing some prices and allowing the yuan to appreciate just a bit, is China's growth finally slowing down?

  • To be sure, China's economy is still growing at a pace that puts it on par with the United States' contribution to overall global growth.
  • Although China is just the world's fourth-largest economy, 11.5% growth in 2007 elevated its contribution to global economic growth to the same level as the U.S.'s.
  • But there are a few signs government efforts to rein in the economy are taking hold.
  • Last month's trade surplus fell to $22.7 billion from $26.2 billion, according to Bloomberg.
  • And money supply is now growing at its slowest in more than six months.
  • According to Bloomberg some fear China may overshoot in their attempts to slow economic growth, further crimping the global economy at exactly the worst time - just as the U.S. economy is slowing.
  • In an article this morning Minyanville Professor Satyajit Das looked at emerging markets in the context of the U.S. credit crunch and slowing economy in "Are Emerging Markets Free of U.S. Credit Crunch."
  • This leads us to today's Number Five...

5. The Baltic Dry Index Runs Aground

The world's coolest-named index, the Baltic Dry Index, is now down about 28% since its peak in October. This raises some important issues about global growth going forward.

  • But first, let's look at what this index measures.
  • The Baltic Dry Index is a number issued daily by the Baltic Exchange, a London-based organization whose members arrange for ocean transport of industrial bulk commodities from producers to end users.
  • Every day they survey brokers around the world to find out how much it costs to book cargoes of raw materials on a variety of shipping routes.
  • The answers are then reformulated as the Baltic Dry Index.
  • Now, why is the Baltic Dry Index considered important?
  • Well, first off, it's not a speculative index. In other words, no one is out there bidding up the Baltic Dry Index because they believe shipping costs will change in the future.
  • Instead, it tracks the actual cost of shipping raw materials by sea based on real cargo bookings and is therefore considered a pretty good indicator of global trade volumes.
  • For those without access to Bloomberg, the Web site Investment has updated Baltic Dry Index data available.

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