[NYTr] Booming Economy: US Asset well runs dry; belt-tightening next

[All the News That Doesn't Fit]

Reuters - Aug 9, 2007
http://www.reuters.com/article/reutersEdge/idUSL0786907520070807?src=080707_1223_INVESTING_column%3A_jim_saft

Asset well runs dry; U.S. belt tightening next

By James Saft

London (Reuters) - With both their houses and their stocks worth
seemingly less day by day, U.S. consumers will just have to tighten
belts.

And if Americans do cut back spending, corporate profits and employment
will be hit, dealing in turn a further blow to asset prices.

Recent signs of consumer vigor have been, to say the least, conflicting.

Growth in consumer spending slowed to 1.3 percent in the first quarter,
down from 3.7 the quarter before, but Conference Board figures released
last week had consumer confidence at its highest level since just before
the September 11 attacks.

An NBC/Wall Street Journal poll found that more than two thirds of
Americans believe the U.S. economy is either in recession now or will be
in the next year.

There are real signs that the distress now showing in asset markets is
registering with consumers. Auto sales have been weak and a number of
lenders have upped their loss allowances for unsecured consumer loans.

This despite the fact that lending conditions in consumer and auto
finance have not tightened abruptly as in housing finance.

Mortgage equity withdrawal (MEW) -- borrowing money against the value of
your home -- was a big boost to consumer spending as U.S. home values
spiraled.

But with house prices now falling, and with mortgage lending standards
tightening, MEW is a dwindling source of funds, to put it mildly.

With shares recently at all-time highs, Americans might have been
forgiven for looking past falling house prices, at least the 50 percent
of them with exposure to stocks.

But the all-time highs are gone, as is the easy credit that made
possible all those tasty share buybacks and leveraged buyouts.

Paul Kasriel of Northern Trust in Chicago says households' total
spending has exceeded personal disposable income starting since 1999.

"There are only two ways households can fund a deficit -- borrow or sell
assets to non-household entities," he said.

"Up until recently, they have been able to borrow relatively
inexpensively against residential real estate. That is over."

With corporate equity retirement now curtailed by tougher credit
conditions, total household spending will slow, he argues.

"The consumer was already pulling back and this will egg that on," said
Marc Chandler, a foreign exchange strategist at Brown Brothers Harriman
in New York.

He thinks though that consumers could prove resilient if markets
stabilize and if oil prices fall.

U.S. crude stands just above $72 per barrel, down more than seven
percent from recent peaks but well above the $61 it cost at the end of
2006.

AUTOS, WINNEBAGOS AND WRITE-OFFS

Looking across the economy, there are several signs of stress.

U.S. auto sales fell almost 9 percent in July, despite easier financing
and more cash rebates.

Mobile homes have been selling poorly too, with new registrations down 7
percent in May.

And a number of Banks and credit card lenders have upped the reserves
they set against bad debts.

American Express (AXP.N: Quote, Profile, Research), which hardly has a
reputation for serving subprime clients, upped its provision for future
loan losses by $1 billion to "reflect higher loan volumes and an
increase in write-off and delinquency rates."

Citibank (C.N: Quote, Profile, Research) too increased estimated losses
in its credit card division when it reported results in July while Bank
of America (BAC.N: Quote, Profile, Research) increased its provision for
credit card losses to $2.85 billion in the second quarter, though
delinquencies fell.

To be sure, credit card loan delinquencies declined in the first quarter
of 2007, according to the latest American Bankers Association Consumer
Credit Delinquency Bulletin, released July 3. Late payments on credit
cards were 4.41 percent of all accounts in the first quarter, compared
to 4.56 percent in the fourth quarter of 2006.

Surprising behavior by the riskiest borrowers may be masking the true
level of distress.

A study by credit bureau Experian looked at four years of payment
records ending last December showed that people with lower credit scores
are paying their credit card bills in aggregate before they pay their
mortgages.

Look then for credit card losses to rise, spending to moderate or fall,
and a further hit to the economy and markets.

(James Saft is a Reuters columnist. The opinions expressed are his own.
You can email him at saft at reuters.com. At the time of publication James
Saft did not own direct investments in any securities mentioned in this
article. He may be an owner indirectly as an investor in a fund)

) Reuters 2006. All rights reserved.