The Wall Street Journal-20080112-Economy Hit As Consumers Tighten Belts- Firms Signal Concern Over Late Payments- -The Teeth of the Storm-
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Economy Hit As Consumers Tighten Belts; Firms Signal Concern Over Late Payments; 'The Teeth of the Storm'
The consumer leg of the economy, which has been remarkably stable throughout the housing downturn, may now be tottering.
The Dow Jones Industrial Average tumbled 246.79 points, or 1.9% to 12606.30 yesterday on the back of fresh signs that consumer spending is slowing. In an indication that even well-heeled shoppers may be cutting back, luxury jeweler Tiffany & Co. said that its U.S. sales slumped during the holiday period. American Express Co. warned late Thursday of rising delinquencies and slowing spending among its cardholders.
They joined a host of companies with close ties to consumers sounding alarm bells. A number of retailers, including Kohl's Corp., cut earnings projections after reporting weaker-than expected sales Thursday. Credit-card company Capital One Financial Corp. said its 2007 earnings would fall short of its earlier forecast. And AT&T Inc. said it has been cutting off more landline and high-speed Internet customers for non-payment.
December auto sales also slumped broadly, with a 3% drop in sales compared to a year ago, according to industry tracker Autodata Corp.
"All of these things that are taking place -- credit markets, energy prices, housing -- are hitting consumers right now," says J.P. Morgan chief economist Bruce Kasman. "We're in the teeth of the storm."
Consumer spending fuels around 70% of U.S. economic output, so a pullback could severely crimp growth. To be sure, U.S. consumers have been resilient in past years and have continued spending even as economists have grown worried about the housing downturn. But now, evidence is mounting that consumers are curbing their spending as they grapple with a growing load of debt.
That's not to say that Wall Street's fears of impending recession will become reality. Mr. Kasman puts the odds of recession at 40%, in line with most other economists recently surveyed by The Wall Street Journal. But it does appear that the trouble that began in the housing market is spreading to other sectors. What's more, high household debt loads may signal that consumers are in a particularly fragile state.
According to the Federal Reserve, credit market instruments -- mostly home mortgages, auto loans and credit-card receivables -- have hit the equivalent of 18.7% of household and nonprofit organization assets, an all-time high.
"Households are in terrible shape right now," says Northern Trust economist Paul Kasriel, who thinks there's a 65% chance of recession next year. "They don't have any reserves to really fall back on."
With house prices falling and mortgage-lending standards tightening, consumers can no longer easily tap into the value of their homes the way they could when prices were rising and lending was easy.
That means that some consumers need to cut back.
Connie Beckers, a 52-year-old artist living in Minneapolis, Minn., says she has always been careful about her money. But she has been especially frugal since last fall, when her adjustable-rate mortgage reset, increasing her monthly payments by $300. She's now working two jobs to make ends meet.
"I have to work extra hard to make extra money," she said. "I live on a very, very tight budget. I shop at secondhand stores for my clothing. I don't buy anything new. Part of that is my choice, but it's also a financial thing."
Housing pressures may be weighing on consumers, but high energy and food costs are also a factor. According to AAA, regular unleaded gasoline is averaging $3.10 a gallon in the U.S., up from $2.99 a month ago and $2.28 a year ago.
Dave Pastor, owner of Fletcher's Appliance in Nashua, N.H., believes that steep gasoline and home-heating costs are probably the biggest thing dipping into his sales. But he suspects consumer-credit woes may also be an issue.
"I'm sure debt is part of this," he says. "People always put stuff on credit cards. It used to be 75% [paid with cash], now it's the other way around. My gut feeling in talking with vendors is that it will be a soft year. People are just waiting, afraid."
The state of things is pushing some Americans into the so-called fringe economy, where consumers seek quick loans via check-cashing storefronts and pawnshops.
"Our typical loan used to be $60 to $100," says Dave Crume, CEO of Topeka, Kan.-based Capitol City Pawn & Jewelry, which runs pawnshops in Kansas and Nebraska. "We do see more people coming in that do need to borrow $400, $500, $1,000. Those are people that need the money for house and car payments and things like that."
"Whether or not we're in a recession we can debate all day," says Michael Goldstein, an international dealer of antique diamonds based in New York City. But he notes that record-high prices for gold have prompted many people to trade in their jewelry for cash.
"I just walked past one of the gold refiners, and there must have been 20 people waiting to see this guy," says Mr. Goldstein. "They're looking to cash in."
Shopping-guide publishers say that advertisers, mostly small businesses, are taking longer to make payments and that more accounts are going delinquent. Restaurants have also reported a sharp fall in sales, according to Oscar Sloterbeck, head of company surveys at investment firm ISI Group.
Yesterday, shares of McDonald's Corp. fell 6.6% after an independent analyst's survey pointed to weak U.S. store sales in December. Analysts at Friedman Billings Ramsey also issued a cautious report on the company.
Airlines and other travel-related businesses, on the other hand, appear to be holding up well, said Mr. Sloterbeck. That's partly thanks to an influx of European customers taking advantage of the weak dollar, but also due to strong demand from U.S. travelers. Figures from Smith Travel Research suggest the U.S. hotel business isn't seeing a spending slowdown.
But that, too, may change. Gerald R. Wonnacott, a 58-year-old from Corvallis, Ore., who tries to keep his credit-card balance at zero, is worried about the economy, and is curtailing spending across the board as a result. "I'm certainly driving less and when I think about vacations, I'm looking at less-expensive vacations," he says.
