So far, the US economy has, somewhat miraculously in our view, stayed out of official recession territory. Growth was held up by booming exports and expansionary fiscal and monetary policy. However, it now distinctly looks like things will turn sour, the negative signs now come from companies in the earnings season. 

We have written before about these usual suspects:

• Consumer confidence is at record lows
• The housing market hasn’t bottomed yet and is destroying wealth
• Inflation is eroding real purchasing power
• Jobs are being destroyed on a steady basis, depressing spending and sentiment further
• Financial institutions have severe problems and in no mood to expand credit
• Now, stock market declines have added to wealth destruction
• Overseas economies have started to slow down, especially in Europe.

Under these circumstances it was something of a miracle that consumer spending has not been affected more strongly, but to be honest, that could only be a matter of time. And that time now seems to have come:

• Carmakers have faced severe declines in demand, even Toyota, who has benefited from a shift towards smaller, more energy efficient cars, has cut back its sales projects for the year from 9.85M to 9.5M.
• American Express saw it’s profits decline by 38% and remarked that the credit risks are by no means restricted to the lower middle classes
• Texas instruments disappointed on both earnings and expectations for current quarter, and considering the fact that it’s chips are in a wide array of consumer products, this doesn’t reflect well on consumer spending
• Apple’s current quarter will miss estimates, despite the launch of the new 3G iPhone

And this is happening just when the tax rebates are hitting the market. What’s more, with housing and credit markets not fixed, there doesn’t seem to be any obvious candidate that might revive things anytime soon.

• In the face of rising inflation, it is unlikely interest rates will move down more (in fact, it’s more likely they will move up)
• Further falls in the dollar will only increase inflation more and might very well revive the upward move in commodities.

The only good news is that oil prices have, as we expected, come down from their highs, but they are still much higher than what most would have thought possible only a short while ago. We think they will trade range bound for a while, if the world economy deteriorates further, they might very well decline some more.

The days house prices were going up and owners could treat their properties as ATM machines (without having to make deposits) are long gone, and are not likely to come back any time soon.

In the mean time, Americans have to get used to something new: living within one’s means. That adjustment can only mean one thing, consumer spending will take more hits. And considering the fact that it is 70% of the economy, that’s not good news.