Is it crunch time for Western consumers?

Consumer spending is the main driver of Western economies. Unfortunately for the UK and US, consumers are seeing their spending power squeezed by rising debts and slowing property markets - which means the future looks bleak on both sides of the Atlantic...

Joe Ellis in his recent book Ahead of the Curve' makes the point that consumer spending ultimately determines business and stock market action. He argues that when this peaks the economy is getting ready to slow down and the stock market is preparing itself for a significant downturn. Consumer spending is the largest sector in the economy; it is 70% of US GDP.

In the past we have pointed out that the UK economist Roger Bootle was making very much the same point. US consumer spending he explained was underpinned by their residential property market. Because of their negative savings rate their spending power has come primarily from equity extraction. Because of this we continue to watch the US homes market.

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In December, new home sales were down 8.9%, whilst existing home sales fell 5.7%.

House builder Oakdene Homes recently issued a property warning.

Median house prices in December declined 4% below the August peak.

Luxury house builder, Toll Brothers, reported that in the fourth quarter of 2005 sales fell 29%, they also cut their sale guidance for 2006.

Foreclosures in 2005 were up 25% compared to 2004.

Adjusted for seasonal variation, the increase in unsold homes and condos from April 2005 was 38%. The largest 8-month increase on record, confirming that the situation is rapidly deteriorating.

We also continue to report fortnightly on the UK Credit Crunch.

The Kensington Group, a mortgage provider that specialises in lending to weak credit applicants, reported that business is booming. The reason they give is that many banks are refusing loans, driving desperate borrowers to them. The writer recalls National Home Loans and others, who enjoyed a similar business boost in the early 90s only to subsequently collapse as a large percentage of their borrowers defaulted.

In the fourth quarter of 2005 personal bankruptcies were 15% higher than for the third quarter. For the whole year it was at 67,580, 45% higher than 2004.

Repossessions of 5,630, for the second half of 2005, were up 22% compared to the first half of 2005. This isn't a big number when compared to the record second half of 1991 of 38,930. However, in 2005 there were 115,352 court actions to repossess, an increase of 50% over 2004. It is a very scary number and these court actions might eventually lead to a new record being set for the number of repossessions.

Consumers have flooded the Debt Free Direct service seeking advice. From 27th December to 8th February they received 17,000 calls.

The credit squeeze is hurting the High Street. The British Retail Consortium said that at the end of January retail sales were at an 11-year low. Kevin Hawkins, their Director General said "We are now back to the reality of a tough, discount-driven retail market. The message from every sector of our industry is the same. The squeeze on customer spending continues unabated".

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

For more from RHAM, visit https://www.rhasset.co.uk/