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Rampant Signs of Economic Deflation as Consumer Spending Contracts

Economics / Recession 2008 - 2010 Apr 09, 2009 - 04:10 AM GMT

By: Mike_Shedlock

Economics Best Financial Markets Analysis ArticleSigns of deflation continue to mount in numerous areas. Let's take a look at some headlines starting with a consumer spending survey: Consumer Spending to Drop Again. U.S. consumer spending will falter after a first-quarter spurt and recover only gradually toward the end of the year, a monthly Bloomberg News survey showed.

Purchases will drop at a 0.5 percent pace from April to June and grow at an average 0.9 percent rate the next six months, according to the median of 51 projections in a survey taken from March 30 to April 8. The estimated 0.5 percent first-quarter gain would break the longest slide since 1991.

Soaring unemployment and tattered household finances are forcing Americans to pay off debt and save more, preventing the economy from gaining traction. What's shaping up to be the worst global recession in the postwar era means companies are also cutting back and foreigners are buying fewer U.S.-made goods.

“We are going to have an economic recovery, but it won't feel like one most of us are used to,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.

Recovery by the end of the year is wishful thinking.

Hong Kong Auctions Sales Fall By 50%

Sotheby's Hong Kong Auction Total Drops by Half as Buyers Stall

Sotheby's sold HK$691 million ($89 million) of antiques, paintings and gems in its five-day Hong Kong sale, less than half of last year's figure, as collectors delayed purchases because of financial uncertainty.

The decline came as art dealers looked for signs of stability after declines in sale totals in New York and London. Asia auctions had been growing for a decade as Hong Kong became an arts center. This time, Sotheby's offered fewer expensive lots, which are less attractive in an economic slowdown, and replaced them with wine lots, which are cheaper.

“Buyers are looking for value,” said Tian Kai, a Beijing-based art dealer who flew in to attend the auction. “Governments are printing so much money now. Fine artworks might be a better way to store value than currency.”

Anyone who proposes that art is a store of value in this environment is either a fool or talking their book.

Oversaturated Restaurant Chains

The New York Times is reporting Empty Tables Threaten Some Restaurant Chains .

During a decade of easy credit and loose spending, American businesses built too many cars, houses, stores and factories. It turns out the country built too many restaurants, too.

Now consumers are cutting back, and dining out is among the casualties. Finer restaurant chains have been hit hard, and so have the casual sit-down places that flooded suburban shopping centers and tourist districts across the country, aimed straight at middle American tastes.

A few chains have boarded up already. Many others are going into survival mode, trying to renegotiate their loans, cutting staff, offering bargains to customers and closing less profitable restaurants. Analysts predict thousands more restaurants could close in the next year or two.

Since 1990, the number of restaurants and bars has grown to 537,000 from 361,000, a 49 percent increase, according to the National Restaurant Association. Population in the United States grew 23 percent in that period.

Amid the seeming prosperity of a credit-fueled era, people got in the habit of eating more and more of their meals out. The association's statistics show that 48 cents of every food dollar is now spent at restaurants, compared with 40.5 cents per dollar in 1985.

Bob Goldin, executive vice president at Technomic, a Chicago consultancy for the restaurant industry, predicted that more than 20,000 restaurants would close over the next three years.

“I think 20,000 is a minimum,” he said. “We probably need more than that. There are a lot of marginal players out there.”

The list of troubled restaurants from the article includes Outback Steakhouse, Krispy Kreme Doughnuts, Sbarro, Applebee's, and Arby's.

Tens of thousands of restaurants are in trouble if spending falls back to 2005 levels. I think restaurant spending falls to 2000 levels.

Unleasable Office Space

Financial fallout is affecting commercial lease rates in New York. Please consider Vacated Midtown Manhattan Offices May Not Be Leased .

Midtown Manhattan, the most expensive U.S. office market, had 10 million square feet of sublease space available at the end of March, 70 percent of which might not be leased, CB Richard Ellis Group Inc. said.

Space being relinquished by financial-services firms and other companies weathering the recession is coming up for sublease with short-term expiration dates that make the properties unattractive to new tenants, said John Powers, New York tri-state chairman for real estate broker CB Richard Ellis. About 7 million square feet of sublets are “effectively unleasable,” he said.

“It's a big problem for the tenant, because the tenant's got an obligation they don't want,” Powers said today at a press briefing. “From the landlord's view, no landlord likes to have a lot of sublease space in their building, and there's no question it's an overhang on pricing.”

CB Richard Ellis estimated average rents fell 16 percent in March from a year ago to $59.35 a square foot. The vacancy rate is the highest since September 2004 and the rent is the lowest since April 2007, according to the firm.

Powers declined to identify holders of the surplus space, citing client relationships.

Manhattan office vacancies rose to 8.5 percent in March from 5.5 percent a year earlier, CB Richard Ellis said. The recession and a shortage of available credit have driven New York's unemployment rate to 8.1 percent, the highest in more than five years, resulting in empty offices and lower rents.

Cushman & Wakefield Inc., a competitor of Los Angeles-based CB Richard Ellis, reported yesterday that Manhattan rents fell in the first quarter by their biggest margin in at least 25 years.

Flotilla of Forsaken Boats

Tapped out consumers can no longer afford to store their toys. Please consider Boats Too Costly to Keep Are Littering Coastlines .

Boat owners are abandoning ship. They often sandpaper over the names and file off the registry numbers, doing their best to render the boats, and themselves, untraceable. Then they casually ditch the vessels in the middle of busy harbors, beach them at low tide on the banks of creeks or occasionally scuttle them outright.

The bad economy is creating a flotilla of forsaken boats. Some of those disposing of their boats are in the same bind as overstretched homeowners: they face steep payments on an asset that is diminishing in value and decide not to continue. They either default on the debt or take bolder measures.

The owners cannot sell them, because the secondhand market is overwhelmed. They cannot afford to spend hundreds of dollars a month mooring and maintaining them. And they do not have the thousands of dollars required to properly dispose of them.

In January, it became illegal in South Carolina to abandon a boat on a public waterway. Violators can be fined $5,000 and jailed for 30 days.

“We never needed a law before,” said Gary Santos, a Mount Pleasant councilman.

I would think that someone would want the boat in the above image for some token amount, or at least for free.

The Un-Stuffed Shopper

The Financial Times is reporting ‘New' US shopper to emerge from crisis .

As the recession dramatic­ally alters where and how Americans spend their money, there is an emerging consensus on the likely profile of the “new” US consumer who will emerge on the other side of the crisis.

A Citigroup report, for example, argues that US consumers are shifting towards “conscientious consumption”, embracing a “thriftiness” focused on value and quality, not quantity. And consumer anthropologists suggest Americans will seek to “un-stuff” their lives, and focus more on the community.

The behavioural changes have included cutting back on “aspirational” luxury shopping. People are using cash and debit cards more than credit, while favouring lower-cost stores such as Wal-Mart and Costco. At supermarkets, well-known national brands have lost ground to retailers' lower-cost own-brand products.

Joan Lewis, head of consumer and market research at Procter & Gamble, the world's largest consumer products company, says there is a remarkable consistency in these shifts, in both developed and developing markets. “We think that many of these changes we have seen will remain for a long time,” she says.

In the US, tighter limits on consumer credit will underpin behavioural shifts. A recent survey of 5,000 US consumers by Alix & Partners predicted that post- recession spending would go back to just 86 per cent of pre-recession levels: about a 10 per cent drop in spending, or a $1,000bn (€760bn, £680bn) annual reduction.

Ed Kerschner, chief investment strategist at Citi Global Wealth Management, says the US has passed an “inflection” point, marking the end of an acceptance of conspicuous consumption that he traces back to the Reagan presidency of the early 1980s. The end of easy access to consumer credit will, he argues, lead to “thriftiness” focused on “value”, rather than “frugality” focused on low prices.

“It's going to be about's not about being frugal or cheap,” he says.

Shift to Thrift is Long-Lasting

Ben Bernanke, please meet Peak Credit and Peak Earnings .

Changing consumer attitudes towards debt are one of the huge forces Bernanke is fighting. The other major force is bank attitudes towards lending. Banks simply have few credit worthy borrowers looking to borrow, and businesses in general have no reason to want to expand.

Global wage arbitrage, rampant overcapacity in the entire consumer sector, and a boomer retirement time bomb that has now gone off, seals the deal that this shift to thrift is not a temporary change.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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