Portents of a consumer-led recession

Signs of a deepening recession continue to mount. The consumer, the backbone of the US economy, is increasingly feeling the pain and constraint of the downturn. Persausive evidence suggests consumer spending, accounting for some seven-tenths of GDP, is likely to soon decline significantly. Indeed, that process may well have already started in earnest. The Conference Board's index of consumer confidence plunged precipitously to 75.0 in February, from 87.3 in January and from 111.2 in February a year ago. That drop is certainly consistent with consumers worsening problems with credit, housing prices, energy costs and the labor market. The rise in intial claims for unemployment benefits to a near recessionary 373,000 level in the week of February 23 suggests that next Friday's February unemployment report will further reinforce the developing recession picture for this lagging economic indicator. Though consumer spending and retail store sales both edged higher in January, even that meager bouyancy will not persist. Even making allowance for the strength of consumer internet and credit card purchases, consumer spending will decline in coming quarterly reports. It is not just the coming rise in unemployment and consequent cut in income that will be the culprit. Rather, it will be the caution in consumer spending mandated by fear of far more layoffs to come, weakening employment prospects and the reduced availability of excessivly easy credit. Forshadowing more trouble ahead for durable goods orders, production and employment, January sales for autos and light trucks were down, both for domestic units and imports.

Adding to the evidence of a consumer led recession is a new economic report, which indicates consumer spendable funds are already in retreat. One of the problems in assessing the current state of the economy is the dependence of analysts on relatively old data that has the further defect of being based on outmoded concepts. To correct for these defects, a new index termed the Consumer Spendables indicator was created by TrimTabs Investment Research. This series attempts to measure all sources of spendable consumer funds, including mortgage refinancing, real estate sales, capital gains on equities, self employment and parnership income, as well as more traditional income sources such as wages and salaries, pensions, dividends and interest. This series is down 0.6% thus far in the current quarter ending in March, from the same quarter last year. This is a significant break from the strong increases in recent years that fueled an unsustainable consumer spending binge. The cutback in profligate housing finance, the downtrend in equity prices and the uptrend in unemployment will all serve to reinforce and extend the decline in consumer income and spending.

It should come as no surprise, given this darkening economic landscape, that Fed Chairman Bernanke in testimony this past week strongly indicated the liklihood of further near-term Fed easing. The Fed is virtually certain to cut the funds rate from its current 3.0% in its March 18 meeting, most likely to 2.5%, and reduce the funds rate further, to at least 2.25%, in April, to 2.0% by year end, and to return to the 1.0% level next year. The recession will quash inflation concerns sufficiently to bring Treasury long-term yields lower, probably to at least retest their cyclical lows.