Papa Bear's morning comments

A look back to LOOK forward

WHY CONSUMER SPENDING WILL BE TOUGH TO CURB (APR 2000!!!)by JAMES C. COOPER & KATHLEEN MADIGAN Apr 24 '00

These are heady times for most consumers, but they may be giving policymakers fits before the year is out. The economy is bolstered by the strongest set of consumer fundamentals in the postwar era. The combination of tight labor markets and loose financial conditions is powering household spending like an afterburner, and the latest data suggest that plenty of fuel remains. That's the problem for policymakers.

The Federal Reserve's efforts to cool off overall demand will bear fruit only if consumers temper their buying spree. But look around. Job creation is still robust, and pay growth has picked up a bit. Fed Governor Laurence H. Meyer said on Apr. 12 that the impact of past Fed rate hikes on financial conditions has been ``nearly zero.'' In fact, broad stock indexes remain high, and yields on long-dated Treasury bonds and mortgages are falling. Moreover, bank loans to both consumers and businesses are accelerating (chart).
What's a policymaker to do? The unfortunate answer might be: Take more aggressive action. True, many households have a wary eye on the bungee-cord gyrations of the stock indexes, especially the tech-heavy Nasdaq. The market's volatility may have a negative psychological impact on spending this quarter. But the wealth effect depends on accumulated gains in portfolios. Equity prices overall, as measured by the broad Wilshire 5000 index, remain 13% higher than a year ago. Consumer spending likely grew at an annual rate of 6% or better last quarter, after a 5.9% surge in the fourth quarter.

http://tinyurl.com/48fwy

Despite the lack of job creation, real consumer spending continues to drive the economy. The lack of wage growth calls the ability of consumers to keep spending into question: (As shown by chart)From Economy.com: "Wages currently account for only 55% of personal income, nearly the lowest on record. Wage growth has been a drag on overall income growth for an unprecedented period (see chart).
Nominal wage income fell on a yearly basis in 2002 for the first time in the history of the series back to 1960 and growth in wages continues to account for only about 40% of income growth, despite recent acceleration.Spending was sustained during this period largely due to other supports to household cash flow. Primarily these came in the form of extraction of rapidly growing home equity and tax cuts. However, as noted many times, those supports to spending are nearing an end.

http://tinyurl.com/2zpyt Consumer credit growth Y/Y is plummeting and chart shows it has been since 2001 !!!Yesterday's SURPRISE DROP by $2.4 B is further evidence consumers have taken us about as far as they can.With ADVANTAGES of manufacturing in ASIA, we cannot expect this type of capital investment to pickup very much. The jobs created last year or so, are in DIRECT result of housing and auto industry, and in retail service as consumer spending was fueled by stimulus and refi's.

BUSINESS spending DID pick up as a result of 2004 TAX incentives, so as happened with auto and housing, we have BORROWED from future demand, the FUEL that pulls us forward.GOV spending lent a hand as well, but with deficits already as historical highs,pressure is mounting to HOLD THE LINE.WHY hasn't this DEMAND for credit led to higher interest rates? that and from the consumer?WE can't pay for what we already owe, will the US have to ask for debt anullment? like Iraqi's?

DEM's was more entitlements paid with tax increases, Republican's want to divert cash away from SS with savings accounts and also offer NO PLAN to deal with unsustainable debts.Timing impossible perhaps......but we have one hell of a piper to pay, and I cannot fathom how this will not hurt the stock market.US companies CANNOT compete with Chinese manufacturers, I see it everyday in my business. MOST of our manufacturers are now just IMPORTERS.

KUDLOW said last night cheaper products abroad would allow businesses to hire more workers with money saved.How does falling behind as a nation that produces and switching to a nation that consumes, basically LOSING the Global game, how does that lead to prosperity.Let the GOV manipulate todays data if they can, let them the FED a cadre' of private banks buy SPX futures in attempt to control market......at some point it will be the wagon....pulling the horse.

Duratek