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Economists warn of a worsening outlook
[June 23, 2008]

Economists warn of a worsening outlook

(Chicago Tribune (KRT) Via Acquire Media NewsEdge) Bring on the smiley faces. It looks like consumers might need them.

Economists and market prognosticators are growing increasingly skeptical that Americans will be able to keep pulling their wallets out of their pockets to shop and pay their bills.

Sure, they trundled off to the store to put their tax rebate checks to work during the last few weeks. The Redbook survey, used to track retail sales growth, just climbed to 2.3 percent for the week of June 14. It grew 1.5 percent preceding the rebates.

But cracks in the consumer's happy face are showing nevertheless.

In an apparent move of desperation Monday, General Motors announced that it was so eager to clear away the glut of 2008 vehicles, the company is offering zero percent financing for six years to people buying certain models this month.

Goldman Sachs strategist David Kostin recommended in a note to clients that they unload financial company stocks and stocks in companies that sell discretionary items like cars, clothes and electronics to consumers. The reason: Credit problems won't peak until 2009 and inflation will curtail consumer demand.

The IRS apparently gave in to gasoline inflationary pressures Monday, announcing that people who drive for business can now deduct 58.5 cents a mile, versus the old 50.5 cents, for mileage between July 1 and the end of the year.

Meanwhile, United Airlines announced plans to cut hundreds of employees and Citigroup thousands.

Merrill Lynch strategist Brian Belski told investors to be skeptical of pundits claiming that the length of past recessions might provide clues to the duration of the current downturn.

"It's hard to believe that this will be an 'average' recession as the consumer continues to weaken," said Belski.

And research by Oppenheimer and Co. Meredith Whitney goes further: "The state of the U.S. consumer continues to deteriorate," she said in a recent report. Her analysis of consumer debt points to problems that will worsen as high food and gasoline prices weigh on people who have fewer options for escaping their debts.

In the past few years, many Americans had an escape that no longer is available to some. They ran up credit card debt and then took out home equity loans, or drew on home equity lines of credit, to wipe the credit card debt away. Now, however, Whitney points out that average equity in homes is at an all-time low of 46.2 percent and dropping at an annual rate of 7 percent. So people cannot borrow on homes that have lost value. Whitney notes that taking cash out of homes is at the lowest level since the beginning of 2004.

Further, even people with equity are constrained by lending practices. Some lenders no longer let people draw on home equity lines of credit if they live in zip codes where other homes have lost value.

Meanwhile, the consumer credit growth rate is at a five-year high, says Whitney.

With the benefit of rebate checks in May, consumers made a larger dent in their credit card debt than they did in April. Yet, compared to a year ago they are falling considerably behind. Despite having a windfall from the IRS, consumers made payments on their credit cards that lagged May 2007's by almost a full percentage point.

That's a red flag for what lies ahead, Whitney said. Payment rates on credit cards are a leading indicator for future delinquency rates. So given the fact that payment levels have been down for seven consecutive months, she says delinquencies should rise.

That, of course, will be bad for delinquent consumers, who will tarnish their ability to get affordable loans in the future. But it is also a reason why investors should be cautious about buying financial company stocks, says Whitney.

Typically, consumers wouldn't be showing so much weakness this early in the cycle, she said. The weakness "signals to us that ultimate loss experience will be far worse than most current expectations."

As lenders fear losses, she estimates they will withdraw $2 trillion in credit card lines by 2010, leaving consumers with less ability to buy on credit.


(Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement without Living Like a Pauper or Winning the Lottery." Contact her at [email protected])


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