from John Maudlin's Inverstor's Newsletter ..
"A Four-Pronged Attack Upon the Economy
Let's turn to those smart guys at Cumberland Advisors for an analysis of how much pressure the consumer is under. They think the Fed might come to a full stop as they are concerned the economy will roll into a recession if the Fed continues on its current path. I have noted in past letters that increased energy prices are going to take a toll on consumer spending. But it is not just energy. Increased interest rate costs on mortgages, the new Alternative Minimum Tax and Katrina all make this worse. They put a pencil to the problem to give us an estimate of the cost and the potential hit to consumer spending.
"Energy is the largest of a four pronged attack upon then economy.We will compare the size of these 4 prongs with Disposable Personal Income (DPI) to demonstrate the magnitude of the problem and why they may lead to a consumer led slowdown.
"Quickly, DPI is about 9 trillion dollars according to the latest Bureau of Economic Analysis (BEA) estimate. It is what the 295 million of us have left to spend after taxes and some other minor adjustments. It is the source of our consumption spending and our debt payments. Fortunately, BEA data break out the energy costs we incur.
"Prong 1. In winter 2004 total energy costs in the U.S. were about 4 1/2% of DPI. We define energy as gasoline, natural gas, heating oil and electricity. By early summer 2005 that had climbed to 5 1/2%. For the next year we are estimating post-Katrina energy cost using near term futures prices. We get over 6% of DPI. It's not just gasoline. Consumers will see it in their monthly heating oil bill or natural gas or electric bills. Budget plan folks are in for their first alarm when the September billing statement arrives in the mail. A 1 1/2% shift against a $9 trillion and gradually rising DPI is over $130 billion. That is our conservative estimate. Note: a 12% increase in the price of energy equates to about a 1/2 point of DPI.
"Prong 2. Mortgage interest rates hikes are already baked in the cake. See our housing bubble series of a few weeks ago archived at . About 2 full percentage point increases on about $1 trillion of adjustable mortgage debt will trigger $20 billion of additional mortgage payments on about 5 million households. They will phase in over the next few months.
"Prong 3. The Congressional Budget Office (CBO) estimates that 14 million taxpayers will be hit with the Alternative Minimum Tax (AMT) starting January 1st. Unless Congress acts (not deemed likely at this moment) the temporary AMT adjustments from the Bush tax cutting will expire. We guess that will average about $2000 per household. AMT addition is $30 billion.
"Prong 4. The ongoing costs of Katrina will continue for the many months; offsetting occurs when the recovery efforts and rebuilding strongly kick in. Eventually a massive amount of new debt will be issued: federal $50 billion; state and local governments ($10 billion); commercial and housing ($ unknown, could be another $50 billion or more). That money will be spent over the next several years. About $25 billion of insurance proceeds will arrive sooner. We think this rebuilding process is going to take a lot of time. Katrina reconstruction is much more difficult than Florida's 4 hurricane hits last year. Preliminary damage estimates are already over a $100 billion with about 3/4 are uninsured.
"Add these up. Without Katrina destruction it is over 2% of DPI. Our numbers are conservative. Add Katrina and the high end is closer to 3%. "Consumers will certainly retrench; the first issue is how much. The second issue is how big is prong 4 and how long until the recovery phase catches hold."



Reply With Quote

Bookmarks