Weakening Consumer Spending in 2006

Bill Bonner produces a daily newsletter caled the Daily Reconing. Bill also has a new book out called Empire of Debt. Today Bill comments on consumer's "plastic savings net"

"Wage rates are getting globalized - good and hard. This makes some
businesses more profitable; they have been able to take advantage of lower
earnings in Asia. But it leaves homegrown labor struggling to make ends
meet. The only way they've been able to put the two ends of the budget
together has been with debt. It is a "plastic safety net" for America's
middle and lower classes, say economists. When they reach in their pockets
and find no coin or paper, they pull out plastic. Average credit card debt
has grown to $8,650 per family, say recent surveys.

Four things have enabled this growth in consumer debt: Asian lenders, the
Fed's low rates, imaginative debt mongers, and the housing bubble. None of
these things are guaranteed by the Constitution. But they allowed
consumers to pull $160 billion out of their houses this year alone,
according to Merrill Lynch. Without that easy lucre, the ready credit, the
I.O. and Neg Am mortgages, many people would be in bigger trouble than
they are now.

"Although the economy has been better than expected," write James Welsh,
"the stage is set for a consumer letdown in the first half of 2006.
Consumers are facing increases in adjustable-rate mortgage payments,
higher minimum credit-card payments, elevated costs to heat their homes
especially in the Northeast, less home-equity extraction, and lower rates
of home appreciation."

In other words, it is about to hurt. That is the problem with the plastic
safety net. It only works if you bounce back quickly. The more you jump on
it, the less elastic it becomes, the deeper you sink, and the harder it is
to climb out, because each time, you carry a heavier burden on your back."

Timothy Burger
timothyb(at)timothyburger.com