Consumer Driven Recovery Facing Uphill Battle

The following chart was provided by Business Insider’s Clusterstock Chart of the Day, and it suggests that the hopes of a consumer driven recovery are facing an uphill battle. Furthermore, even though American Express (AXP) got a lift today with better than a month ago charge off rates, they were still quite high at 9.9%. Charge offs are accounts that lenders are writing off as uncollectible. Charge-offs generally travel in line with unemployment which continues to increase with few signs of reversing course.

With consumer debt at historically very high levels and savings rates climbing, it is difficult to see how spending will rebound in the next few quarters. The impact of this on GDP could be substantial as consumption has accounted for about seven-tenths of GDP in recent years. With credit card companies and banks left holding the bag with rapidly defaulting consumer credit accounts, we would expect the availability of additional consumer credit to be somewhat more scarce going forward.

The one potential caveat to this analysis is rising inflation. If inflation begins to take hold then the borrower has the advantage and presumably can more easily pay down the nominal debt. If a dollar tomorrow is worth less than a dollar yesterday then debts become more manageable. This is not at all far fetched as the money supply continues to expand, and the national deficit has hit $1T in the first nine months of the fiscal year. No one knows when or if inflation will begin to take hold, but it appears that the interim could be painful with consumers maxed out and the economy in contraction.

Consumer Led Recovery? Not Yet

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.