Foros de la Plataforma por una Vivienda Digna

[billy]

Consumer Crunch: September Update

Steve Church is an investment consultant with 20 years of experience with large investors. The following is a synopsis of more complete paper. The full paper is available at no charge to registered users of www.piscataquaresearch.com.

Our “Consumer Crunch” analyses have attracted wide attention. We think that has occurred because they show an easy-to-understand process of how U.S. households are gaining and losing cash with predictable economic results. This is our September update.

The latest economic statistics show that consumers depended on new debt for 88% of their cash flow during 2005. In 2006, we expect new debt to again account for 88% of cash flow. Historically, consumers have used debt for 40% to 50% of cash flow.

Now, any decline in debt flow translates to a decline in cash flow. Our “Real Estate and Money Supply” paper showed that the side effects of a decline in debt flow include a decline in M-2 growth.

It is important to realize that annual monthly M-2 growth has never been negative based on monthly M-2 statistics extending back to 1959. If M-2 growth declines toward 0%, it would indicate an extraordinary economy. Since the end of June, M-2 has not increased.

Using our “Real Estate and Money Supply” paper, we also developed a 6-step economic process that we expect the economy to follow. In our 6-step process, new home construction does not slow until after home resales have entered a continuing and persistent decline.

Early indicators of future construction are dropping as July information showed that the permitting process declined over 20% on a year-over-year basis. August information indicates that home starts have also declined over 20% while current homes under construction remain at 2005 levels.

The Economic Process

In our June update of this information, we were in Step 4 of this economic process. At the time, we indicated that the latest information might mean that we were in transition to Step 5.



Current information indicates that we have progressed at least to Step 5 of that process. In our opinion, Step 5 should be the doorstep to a recession. The process follows:



Step 1: The Federal Reserve raises interest rates and begins effecting the willingness and ability of consumers to access their back-up liquidity: home equity loans. This piece began in summer of 2004.



Step 2: Consumers allow M-1 growth to stagnate instead of accessing home equity loans to maintain liquidity. M-1 growth reached 0% in November, 2004. Since November, 2004, M-1 is nearly unchanged.



Step 3: Liquidity becomes more dependent on mortgage refinancing. Consumers recognize that the best way to increase short-term liquidity is by controlling large purchases based upon their access to long-term financing. The sales fluctuations in the auto industry have shown this view to be correct.



Step 4: Existing home resales moderate as consumer liquidity remains under pressure. New home sales remain strong. Since home resales generate M-2 and new home sales deplete M-2, this step is the critical step. Home resales peaked in June through November, 2005 and have been persistently under pressure since November.



Step 5: Existing home resales decline. Home resales are now clearly declining. August information shows home resales down 12.6% from 2005. Median home resale prices are also down 1.7% from 2005.



M-2 mortgage-related accounts have reached 0% growth on a year-over-year basis. M-2, itself, has been flat since the end of June.



Step 6: New home sales and remodeling decline. This step is beginning as the permitting and home starts process show a major slowdown. Land banking is also declining.



Current construction remains high as builders rush to finish and clear inventories. The falling sales prices and profit margins are needed to clear inventory.



The falling permit levels and housing starts are consistent with a Step 6 slowdown and the start of an economic recession. Household debt generation and cash flow should decline. Household income growth should decline as employment and profit side effects appear. Economic activity could enter a recession.



We have progressed to Step 5 of this consumer cash flow driven process. The most recent data supports the contention that we are in Step 6 of this process. Though we cannot reject that contention, we do not yet accept it.



In our opinion, it is possible that a recession started in July. The consumer cash flow and consumer liquidity data in our full paper provide some support for that interpretation.



Our current economic guesstimates show that the fourth quarter of 2006 could be the first quarter of negative real growth. Based on our review of consumer liquidity and of our housing market model, a serious recession starting in the next few months is possible. In the best case, we barely avoid a recession that starts soon.



Conclusion



The conclusion from our “Money Supply and Real Estate” paper has not changed: slowing home resales could cause a decline in M-2 growth. Both home resale levels and home resale prices are turning negative. A decline in M-2 growth would occur starting in Step 5 of our process. Current statistics are consistent with a decline in M-2 growth.



Consumer liquidity continues to drop dramatically in a process consistent with our previous analyses. Our models point to a small, but real, possibility of a nominal decline in personal consumption expenditures during 2007. The last time a nominal decline in personal consumption expenditures occurred was in 1938.



Since we believe that the U.S. government will do everything that it can to maintain inflation, we do not expect a nominal decline in consumption. However, if inflation begins to decline, then we would not be surprised by a nominal decline in consumption and a significant recession.



*If you want our complete analysis free of charge, please go to www.piscataquaresearch.com.


Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

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