Good News---U.S. consumer spends?

Watch Out. Here comes another impressionistic market commentary, unadorned by research and not hampered by accountability.

Tuesday's news that U.S. consumer spending rose 2.3% in January despite higher fuel costs, higher interest rates, and a leveling of home prices was widely viewed as big news, big good news. Is this really good news?
Where is the spending coming from? Tax cuts have helped over the last few years, but with the focus on the deficit in Congress now, there will be no more money from that spigot. At this point it's not news at all that the home as a giant ATM is running out of cash. People could be saving less, but with aggregate consumer savings at 0, that would be negative savings, often referred to as debt. There is currently some aggregate job growth and wage growth, but what kind of jobs and what kind of wage distribution?

Could it be that consumer spending is reflecting an ingrained and seemingly necessary habit unrelated to the consumer balance sheet? Children do need a lot of stuff, everybody needs to drive and needs heat, and simple pleasures like going out to eat a few nights a week and going to the mall or Walmart to get a few things on sale are a part of life(fyi, while aggregate consumer spending in January was up 2.3%, spending in the restaurant and bars segment for January was up 3.2%).

Here are a few more possible facts in this consumer equation. In 2004 37% of all consumer mortgage financing was adjustable rate and of that 88% of the lower credit score segment was adjustable. With predominantly two and three year resets, these adjustable rate mortgages will increase by at least 1.5% in 2006 and 2007. On large numbers, that will be a large increase.

So what's my point, as my daughter would say. Credit cycles always come around. It's been awhile. They always result from excess. It may be months and may be a year or more, but it's hard to see how significant consumer credit defaults in credit cards and mortgages are not in the cards, or those cards, already. If that thinking is by any chance correct, the longer things are "good", the harder the fall.

But that the numbers overall look good seems to be the consensus. That view concerns me because the numbers are aggregate numbers. What is the distribution within those numbers? Just completely hypothetically, if the aggregate numbers stay fine but at some point 20% of the sample gets to the end of their rope on their mortgages and credit cards, could that be a crisis in the aggregate economy.

What's the good news on the credit front. Corporate balance sheets are overall in good shape. Commercial real estate financing is generally speaking as sound as its been in decades. But the linkage between this good business news and the consumer is not as strong as it was even a decade ago. The business sector is now generally more global, investor focused, and service oriented. The consumer sector is national and has multiple labor and wealth characteristics.

So why the heck do I write all of this if I'm not offering a solution, and I'm not. Well, awareness and discussion is a good thing. I can selfishly get this thought off my mind and come up with something more upbeat to think about. And I can move to a more optimistic point of view that the U.S. often has an uncanny ability to adjust as the trends become clear. Business Week's 2/13 issue has a cover article entitled "Unmasking the Economy---why it's much stronger than you think". It's not my favorite magazine, but there are some interesting thoughts there.

Well, enough of this. The sun just came out.