The million dollar question which will determine the fate of the current bull market is "How Long Can Consumers Keep the Economy Going?". Corporations have not stepped up in any significant way to offset any potential decrease in Consumer spending. This question will have wide-sweeping implications for the overall economy. As a follow-up to my reference to the article on Plutonomy, I found an interesting article from the Associated Press that discusses the current disconnect betweent the wealthiest 9% earning over $100,000 and the remaining 91% that do not and the implications of inflation to both groups. The themes in this article highlight the potential risks to the overall economy for both the upper and middle class:
How Long Can Consumers Keep Economy Going?
NEW YORK (AP) - Wall Street is worried about you.
Yes, you. The one they call "The Consumer." From the trophy-arrayed corner office of the richest CEO to the windowless cubicle of the most junior analyst, your immediate future is a pressing concern. What will you get for Christmas? How much will it cost to heat your house this winter? Will you get a raise next year?
This isn't personal. What they really care about is the 70 percent of gross domestic product that depends on consumer spending. Put another way, the 70 percent of the total economy that depends on you.
Retailers, car makers, consumer technology companies, wireless carriers, home builders: They all count on you.
You've been keeping the economy churning during the last five years, spending enough to make up for sluggish corporate spending. When you got tax cuts, you quickly spent them. Rising housing prices let you take out second and third mortgages, using your house as an ATM.
But now you're just not spending the way you were.
You aren't buying as many cars as you used to -- October auto sales were the weakest for any month since mid-1998. Your interest in home buying has hit its lowest level since 1991.
Your debt has increased. Outstanding balances on credit cards have risen to more than $800 billion, or $7,200 per U.S. household. The United States debt-to-income ratio rose as much in the past five years as it did in the previous 15 years, according to Merrill Lynch.
Your outlook is gloomy. "Our Consumer index continued to fall off a cliff in the past week," Merrill said in an Oct. 21 note. The last week in October, the ABC/Washington Post "consumer comfort index" dropped to roughly the same level reached after the hurricanes struck the Gulf Coast.
While October sales at many chain stores remained strong, you're eating at restaurants less. Sales at "food services and drinking places" increased only 0.2 percent in September, according to a Goldman Sachs report. That's the fifth straight month of an increase at or below that meager pace.
"Usually, restaurant spending turns down before or during economic slowdowns," the report said.
The fact is, you could use a little more money. While economists look at "core" inflation, which strips out volatile energy and food prices, you need only look at your bills to see that life has become more expensive.
Jumps in gasoline and heating prices make getting anywhere and staying warm at home more challenging. Increases in interest rates and higher minimum credit card payments have chipped away at your checking account. If you've been renting and want to buy a home, good luck: Affordability for first-time home buyers is the worst it has been in 16 years.
Then, there's your pay.
"Here we are, officially celebrating the fourth anniversary of this economic expansion, and the wage income share of the national income pie is south of 46 percent," fumed a research note by Merrill Lynch North American economist David A. Rosenberg. "At no point in the past 50 years has this ratio been so low so far into a business cycle." Historically, the ratio has been 3.5 percentage points higher.
The ratio is important because it looks at wages -- your paycheck -- instead of other sources of income, like the stellar Wall Street bonuses we saw last year and are almost certain to see again this year. Wage gains haven't kept pace with inflation, but total income continues to look good, thanks to those hefty bonuses.
Americans now find themselves in one of two groups: The 9 percent who make $100,000 or more and the 91 percent who don't, said Diane C. Swonk, senior managing director and chief economist at Mesirow Financial, a financial services firm based in Chicago.
"The bifurcation of the economy makes the economy look better on paper than it does to the majority of consumers," she said.
She blames the lousy summer movie season on higher gasoline prices, which inspired families to stay home and rent a DVD instead of spending $50 for gas and movie tickets. Wal-Mart Stores Inc. and Target Corp. did well during back-to-school shopping season, she said, "because middle income households started to move down the food chain."
For the top 9 percent, the good times continue to roll. According to Swonk, World Series tickets sold for $15,000 a pair. The Four Seasons Hotels Inc. says its $500 and higher rooms are doing better than ever, topping the Internet boom years. Sales of Coach Inc. handbags, which average about $435, increased 9 percent last summer and have stayed there.
After the Internet bust, "we kept this wealthy population," Swonk said. "The problem is, we continue to restructure everyone else. We want a flexible economy, but the trade off is pain."
That's why Wall Street is worried about you. No bond broker (unless you have one in your family) cares whether your car breaks down or you spend winter shivering in a sleeping bag, hoping the pipes don't freeze. But if you, the 91 percent of the population called The Consumer, hit a point where a trip to Target is out of the question, even the Coach-handbag carrying Four Seasons Hotel-staying 9 percent may feel the pain.
