The U.S. consumer has so far survived housing, oil, stalled wage growth, and soaring food costs. But the honeymoon will soon end, says California-based currency fund manager Merk. As higher production prices move through the system, Merk sees a sharp downturn in consumption will only be momentarily ameliorated by rebate checks:
On a real basis consumption has slowed visibly. Real demand for durables declined -0.5% in March, while only increasing 0.2% for non-durables and services which are all well below cyclical levels. As Martin Feldstein, President of the National Bureau of Economic Research pointed out in the “afterglow” of the 0.6% rate of growth in the Q1’08 “that monthly data since January indicate that economic activity and overall growth have been declining since the beginning of 2008.” We think that real spending in the upcoming personal consumption report for April will at best arrive flat with a very real risk of the second negative posting in the past five months.
Merk sees rebate checks saving the day in Q2, swinging what would have otherwise been a quarter of -1.0% shrinkage into positive territory at 0.4%:
The next few months will provide a very difficult proving ground for both the consumer and the fiscal policies designed to influence the duration and intensity of the slide into recession. We do think that the net impact of the $110bln in rebates that started to go out on May 2 is that it will add 0.1% to personal disposable income.
After that, Merk says, it’s the dreaded “sub-trend growth”:
In our estimation the primary impact from the rebate checks will not substantially show up until Q3’08. However, we do not see much on the other side of the net impact from the stimulus that will provide a support for the consumer, thus setting the stage for a prolonged period of sub-trend growth in the economy.