KEY POINTS:
Whether it's Big Macs, big rocks or big trucks, US consumers are tightening their purse strings, and the squeeze may topple the US economy into recession.
Today, economists expect the Commerce Department to report flat retail sales for December, and some suspect that the number could be negative as the housing downturn, tougher credit conditions and steep inflation sink household spending. A negative reading in December would mark the first decline since June.
"December's retail sales update may tell whether consumer spending has the legs to keep the expansion on track," Global Insight economists wrote in a client note.
Economists were bracing for a soft sales report after a host of retailers posted disappointing holiday season sales figures in recent days. Consumer spending accounts for more than two-thirds of US economic activity, which is why economists pay close attention.
What they found particularly worrying was the breadth of the slowdown. The bad consumer spending news has come not only from Big Mac maker McDonald's and lower-priced retailers Kmart and Sears, but also luxury chains such as jeweller Tiffany.
"We believe a recent pullback in US spending likely reflected a more cautious attitude among consumers about the near-term direction of the economy," Tiffany CEO Michael Kowalski said last week.
Yesterday, Ford Motor said industry-wide car sales were likely to drop in the first half of this year. US recession talk picked up after disappointing data on December employment and manufacturing, and a subpar holiday shopping season has added to the gloom.
Sales may suffer more in the coming months as tightening credit conditions spread beyond the housing market and into credit cards.
"In the easy housing money years, consumers were racking up debt on their credit cards, then rolling that debt into lower-interest home equity loans or using cash-out refinancings to pay down the higher interest rate credit card debt," said Gary Balter, retail sector analyst with Credit Suisse.
"With that safety net no longer available, credit card balances are growing sharply, increasing debt servicing costs. Consumers are struggling to meet these costs,evidenced by mounting credit card delinquencies and losses."
Credit card debt jumped by 11.3 per cent to US$937.5 billion ($1.1 trillion) in November, according to US Federal Reserve data.
Credit card company American Express warned last week that delinquencies were on the rise, particularly in California, Florida and other regions hardest hit by the housing downturn.
Balter said: "With credit card delinquencies rising and securitisations tougher to do, we worry when that shoe will drop, further impacting retail spending."
He has lowered investment ratings on many retailers.
Goldman Sachs also took a dimmer view of retailers across the price spectrum, from handbag maker Coach Inc to Sears, owner of Kmart and Sears stores.
Even the retailers' trade association said 2008 looked less than rosy. The National Retail Federation said retail sales were likely to grow 3.5 per cent from a year earlier, the slowest pace in six years.
"We don't know whether it will be a recession or not," federation chief economist Rosalind Wells said. "It's just not going to feel good to anyone."
- Reuters
