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Consumer Spending Soars

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Unable or unwilling to extract mortgage equity, but still needing to meet mortgage obligations, rising food prices, and rising gasoline prices, consumers simply said "Charge-It."

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The headline news is Consumers Boost Borrowing at Fastest Pace in 4 Months Despite Energy Prices, Housing Slump.

Consumers boosted their borrowing in March at the fastest pace in four months, showing resilience in the face of rising energy prices and a painful housing slump.

The Federal Reserve's report, released Monday, showed consumer credit increased at a brisk annual rate of 6.7 percent in March. That marked a pickup from February's 2.8 percent growth rate and was the biggest increase since November.

Consumer spending is indispensable to a healthy economy. The economy grew at an anemic 1.3 percent pace in the January-to-March quarter, the weakest in four years, due to fallout from the housing slump and belt tightening by businesses. Consumers, however, managed to continue spending, an important factor in keeping the economy moving.

Use of revolving credit, primarily credit cards, rose at a sizzling pace of 9.2 percent in March. That was up from a 2.9 percent growth rate in February and was the biggest increase since November.

Demand for nonrevolving credit used to finance cars, vacations, education and other things, also picked up. Nonrevolving credit use rose at a 5.2 percent pace in March, compared with a 2.7 percent growth rate in February.

The Fed's measure of consumer borrowing does not include mortgages or other loans secured by real estate. The March increase pushed total consumer debt up by a whopping $13.46 billion to a record $2.43 trillion.

Energy prices, meanwhile, have surged to a record nationwide average of $3.07 per gallon, oil industry analyst Trilby Lundberg said Sunday. The previous record was $3.03 per gallon on Aug. 11, 2006.


Is that headline backwards? Perhaps revolving credit is soaring because of high energy prices. Unable or unwilling to extract mortgage equity, but still needing to meet mortgage obligations, rising food prices, and rising gasoline prices, consumers simply said "Charge-It."

Here is the official Consumer Credit Release. Note that the release was for March which puts this spending in the first quarter. For all that spending, first quarter GDP clocked in at a mere 1.3%.

This huge increase in revolving debt right in the face of a slowing economy smacks of inability to service current debt. And ability to service debt depends on jobs and rising wages. So what are consumers going to do for an encore given the slowdown in jobs and wages as discussed in:


Consumers can only postpone the inevitable for so long (and even then only as long as they have a job). The slowdown in MEW (mortgage equity withdrawal) took away one leg of support, and a slowdown in jobs will take away another. Foreclosures and bankruptcies are now both set to soar.

With that backdrop it is probably fitting that Superbear Richard Russell throws in the towel.

"We saw something that is extremely rare [on April 20 and April 25], in fact I can't remember ever having seen this before. What I'm referring to is that on those two dates all three Dow Jones Averages -- Industrials, Transports, and Utilities closed at simultaneous historic highs. To me, a fellow steeped in Dow Theory for over half a century, this was like a clap of thunder... My take on the situation is that the stock market (and the Dow Theory) told us that an unprecedented world boom lies ahead."
Russell acknowledges that what he has written will surprise many who are accustomed to his long-standing caution about the stock market. He imagines that we will want to respond by saying "But Russell, you're usually so conservative, so restrained. How can you possibly talk this way? Now you're talking about a worldwide boom. Are you smoking something we don't know about?"

Russell's response:

"I stopped smoking over 40 year ago. No, I'm simply relating to you my interpretation of what the market is saying. I believe the markets talk in their own secret language. And when the market does something that has never been done before, that serves as a 'kick in the pants' for me. It's telling me, 'Russell, wake up. Something very unusual is going on. Get up out of your chair -- and pay attention.'"

No positions in stocks mentioned.
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