The Tightening Wallet

Consumers tightened their wallet a little more in August. The U.S. Commerce Department reported Friday that consumer spending in the U.S. rose only one-tenth of one percent in August, the smallest gain since November 2005.

The U.S. consumer spending numbers came in at half what economists had predicted. But can you blame consumers?

I have been writing about how the slowdown in the U.S. housing market would eventually affect the spending habits of consumers. American consumers, who had used the equity in their homes as a proverbial bank for years, may be finding it more difficult to use their “home equity bank” right now.

The proof is in the numbers. In the second quarter of 2006, American consumers took out 23% less in home equity loans than they did in the first quarter of 2006. While the third quarter numbers aren’t out yet, my bet is that consumers took even less out in home equity loans in the third quarter.

Two factors working here to slow down consumer spending that will eventually mean a slower economy. When you feel less wealthy than you did last year, it’s typical to tighten your wallet. It’s just doesn’t feel as good spending when you’re worried about your wealth (mostly your home equity) possibly declining.

Secondly, as housing prices have stopped rising, so has the amount of cash available to typical homeowners who use home equity lines. One could say that personal “home equity bank” is running out of cash. And that can’t feel good either. “Better tighten the wallet” is a natural reaction.

I’m looking for retail sales to start softening in the U.S. next while. Wouldn’t want to own any retail stocks right now… at least not until the Fed starts lowering interest rates again.

NEWSFLASH–For the quarter ended September 30, 2006, U.S. Treasuries had their biggest quarterly gain in four years. I’ve been predicting a slower economy ahead. And a slower economy means lower interest rates–exactly what the bond market has been sniffing. My readers may recall I turned bullish on quality U.S. bonds about three months ago. Hope you heeded my suggestion.