The New York Times published an article written by Michael Barbaro and Louis Uchitelle on Monday, January 14, 2008 entitled Americans Cut Back Sharply on Spending. Toomre Capital Markets LLC ("TCM") strongly encourages readers of this blog to review as this article suggests that not only are Americans slowing the overall growth rate of spending, but for the first time since 1991 may actually be experiencing a very rare decline in aggregate consumption.

If this slowdown/decline in consumption is indeed true (which TCM has been suggesting for several months now), that fact implies some severe economic stresses are ahead for the United States economy and the Wall Street financial system in particular. The reader might do well to remember that the current stresses in sub-prime mortgages and junk bonds are occurring in times of relatively healthy economic growth. Just how bad the delinquency, default and loss in event of default numbers will become is anyone's guess. One thing is very certain though. This consumer slowdown and resulting flipping of the economy into recession is going to have significant political repercussions as it is almost certain that the Federal Reserve alone cannot right the "economic ship" in the coming months before the 2008 presidential elections.

This New York Times article starts with:

Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy. The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy. A raft of consumer companies — high-end stores like Nordstrom and Tiffany, and middle-of-the-road ones like Target and J. C. Penney — reported a pronounced slowdown in growth last month, and in several cases an outright drop in business. American Express said that starting in early December the growth in the rate of spending by its 52 million cardholders, a generally affluent group of consumers, fell 3 percentage points, from 13 percent to 10 percent, the first slowdown since the 2001 recession.

And consumer confidence, an important barometer of economic health, has plunged. Andrew Kohut, president of the Pew Research Center, says consumer satisfaction with the economy has reached a 15-year low, according to the firm’s polling. Even wealthier consumers, who were seen as invulnerable to rising gasoline prices and falling home values, are feeling the squeeze. “People are clearly concerned that we are headed into a recession,” said Stephen I. Sadove, the chief executive of Saks Fifth Avenue, the upscale department store whose runaway growth throughout much of the year slowed markedly in December.A significant middle section of the article has more details on how official statistics show that consumer spending has not yet dropped. However, the article does detail how the recent slowdown is affecting more than just the Have Not's. Apparently, the upper middle class and even affluent members of the United States economy are sharply reducing their spending.

Official statistics do not yet show that consumer spending has dropped, but they do suggest that in late 2007, it slowed in areas like automobiles, furniture, building materials and health care, said Mark M. Zandi, chief economist at Moody’s Economy.com.

Fresh evidence of a pullback is pouring in from many quarters as Americans confront the triple threats of higher energy costs, falling home prices and a volatile stock market. Perhaps the strongest barometer over the last 30 days is the performance of the country’s big chain stores. December turned out to be a blood bath for retailers at every rung on the economic ladder, with sales for the month growing at the slowest rate in seven years. Sales at stores open at least a year, a crucial yardstick in retailing, plunged by 11 percent at Kohl’s and 7.9 percent at Macy’s, compared with last year.

Chains that cater to the middle and upper classes, which have benefited from years of trading up — when customers splurge on select expensive products — struggled as well. Coach, the leather goods maker, said sales of its popular handbags had become sluggish, prompting the company to issue rare coupons to drum up business. “This is the real deal — consumers are slowing down across the spectrum,” said David Schick, a retail analyst at Stifel Nicolaus.

But it is the trouble at the highest reaches of retailing that has economists most worried about a recession. Over the last year, even as low-wage and middle-income consumers have cut back, the wealthy have spent freely, keeping high-end chains insulated from the economic turbulence. That started to change in December, as shoppers held off on buying $300 designer shoes and $500 dresses. For example, store sales fell 4 percent at Nordstrom, the high-end department store. And Tiffany, the upscale jeweler, said the number of purchases at its stores dropped last month. In an interview, its chief executive, Michael J. Kowalski, said that even if the wealthy remain so at least on paper, their economic anxiety is taking a toll.

TCM notes with interest the paragraph, “We are seeing a correlation with housing prices,” said Michael O’Neill, a spokesman for American Express. “The falloff in spending is everywhere in the country, but it is greatest in those areas like south Florida and California, where home prices have fallen the most.” TCM does not have access to the underlying data, but would strong suggest that there is an even higher correlation between economic stress with hybrid mortgages, such as Option Arms and 2/28 mortgages, and cash-out refinance mortgages.

One seriously has to wonder just how much of the recent consumer consumption was supported by cash-out refinances. Was it as 20%, 40% or even greater than 50% of consumer consumption? Reader comments and thoughts are welcome. TCM would very much appreciate links to relevant data.