US retail sales fell 2.8% in October, according to the Commerce Department. While a sizable portion can be attributed to falling gas prices and declining auto sales, the contraction was widespread. There are four major concerns facing consumers: falling house prices; a resultant rise in debt levels relative to their net worth; rising unemployment and the threat of lay-offs; and higher credit card interest rates and lack of access to new credit. All are restraining consumer spending. Any savings from lower gas prices, as a result, will go towards paying off debt rather than financing new purchases. Faith in the ever-lasting boom is now seriously fractured and consumers are likely to adopt a more conservative outlook, paying off debt and increasing savings.
Declining consumer spending will cause a recession in most global economies — and don’t expect a short V-bottom. Politicians will attempt to create the illusion that the boom is back: supressing interest rates to discourage savings and encourage borrowing. But consumers are unlikely to fall for that trick too soon.
The risk is that lower consumer spending starts a downward spiral, with lower sales resulting in further job cuts, which in turn causes further falls in spending. Government response to this is generally big spending programs, especially on infrastructure, but these can either debase the currency if funded through a budget deficit, or hurt consumer spending if funded through increased taxes. The consumer is the backbone of the economy and the quickest, safest route to restore stability to the market place. Encourage consumers to save on energy costs by offering rebates on electric or alternative energy automobiles, use of public transport systems, and other energy-saving devices. That way you can use the new savings ethic to actually stimulate spending, while reducing reliance on oil imports.
Interbank Spreads
The NYFR-OIS 1-month spread fell to 1.0 percent, and appears headed for a return to the normal margin of 50 basis points (0.50%). Fed injection of close to a trillion dollars in the last two months, and interposing itself as intermediary in the interbank market, is finalling breaking the gridlock. But this does not mean that markets have returned to normal — they remain on life support.
The NYFR is a broader, independent alternative to LIBOR, while the overnight index swap rate (OIS) reflects traders’ expectations of the overnight fed funds rate. The 0.50 percent spread between the OIS and the fed funds target rate points to another rate cut.
By Colin Twiggs
November 15, 5:00 a.m. ET (8:00 p.m. AET)
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