KEY POINTS:
I wrote in a column in 2002 that Time magazine erred in not naming US consumers Person of the Year, in recognition of their impressive purchases of cars and houses in the 2001 recession.
The US consumer has stayed resilient, even in the face of a recovery with
declining family income. Now, however, many forecasters see them as they would Butch Cassidy and the Sundance Kid trying to escape from the Bolivian army: you may have a good run, but the forces you are about to face are overwhelming.
Richard Berner of Morgan Stanley called the combination of a softening job market, higher oil and food prices, rising mortgage costs, tighter lending standards, and falling home prices, a "perfect storm" for consumers.
And yet, the consumer is still firing away. US consumption rose 3 per cent in the third quarter, adding 2.1 per cent to the 3.9 per cent increase in gross domestic product.
And, just over a week ago, consumers again beat expectations, delivering US$10.3 billion (NZ$13.5 billion) in sales on Black Friday - an 8.3 per cent gain over last year.
So is the consumer a super hero who defies the normal rules?
Should Time magazine just come out early and name them Person of the Decade?
One deferred wound could be the result of declining mortgage-equity withdrawal. I have long said that consumer spending has been unusually dependent on the dramatic increase in Americans using their homes like automated teller machines, as equity withdrawal increased from a little more than 1 per cent of GDP in 1995 to a peak of more than 8 per cent in 2005.
Yes, mortgage-equity withdrawal has started to fall, but it still hasn't hit the consumer as much as many had predicted. Yet, I tend to share the view of New York University's Nouriel Roubini that equity extractors may have kept spending because they were waiting for more evidence that the accumulating bad news was for real.
Rising foreclosures, falling home prices and declining consumer confidence may finally force this reality to sink in. And with so-called active mortgage-equity withdrawal, which comes from home-equity extraction and cash-out refinancing, forecast to plunge to an annualised US$50 billion in the first quarter of 2008, from US$286 billion in the first quarter of 2007, this lagging hit could sting early next year.
Adding to the lagging storm is the timing of when interest rates reset for a large block of adjustable-rate mortgages (ARM). Simply put, the high-water mark of ARM distress has yet to be hit. Data from Banc of America Securities suggest that ARM resets in the first four months of 2008 may exceed the value of ARM resets for the first eight months of 2007 combined.
The composition of the mortgages is no comfort. Christopher Cagan of First American CoreLogic, a California firm specialising in residential mortgage risk management, found that resets will hurt those who "are most exposed, particularly those with teaser and sub-prime loans extended with low down payments when prices were at or near historic highs".
Cagan estimates that a whopping 81 per cent of borrowers with loans due to reset in 2008 have costly mortgages with initial interest rates of 6.5 per cent to 12 per cent. After adjustment, monthly payments for these borrowers could rise by almost a third.
And then there are energy prices. While oil has already soared to almost US$100 a barrel, vehicle owners were spared much of the pain this year. From May to October, the average monthly price of Brent crude jumped from US$67.21 to US$82.34 a barrel, while retail petrol prices fell.
Oil prices rose almost 23 per cent while gas prices declined 12 per cent. It turned out that refiners had been running very high profit margins on transforming oil into petrol and heating oil and were able to take the hit without passing it on to consumers.
Yet many analysts predict gas to rise by 25 per cent next year. The Department of Energy's Energy Information Administration projects that heating oil users might spend 26 per cent more this Northern Hemisphere winter than last, while those using other fuels might spend 11 per cent to 20 per cent more.
Although each of these elements alone might be played down as too small to have a major impact on the economy, a combination of these economic currents might swirl together to weaken the job market and create a negative cycle of expectations.
With low personal savings and high credit-card debt leaving consumers sparse cushions for bad times, a perfect lagging storm hitting in early 2008 may be the force that at last breaks the spirit of the resilient American consumer.
* Gene Sperling, author of The Pro-Growth Progressive, was President Bill Clinton's top economic adviser. He is a senior fellow at the Centre for American Progress and is advising Hillary Clinton in her bid for the 2008 presidential nomination.
- Bloomberg
