Available consumer dollars, and the flintstones
Available consumer dollars - ACD, is a measure of discretionary consumer spending.There are many moving parts, but almost all of these variables are moving in a negative direction when it comes to consumer spending, and more importantly, consumer discretionary spending. We will be analyzing the typical US family, the Flintstones.
I will be focusing on available consumer dollars - ACD. Lower take home wages, plus the increases in all household expenses will cause a large fall in ACD over the next 12-24 months IMHO. Here are some of the variables that will effect ACD.
Income - take home pay:
Negative real wages for the past 8 years. Consecutive job losses 4 months in a row. The continued future federal budget deficit. Much higher health care cost that employers need to pay. And by the way, we are in a recession.
And Fred keeps dropping chunks of rocks on his feet. Mr Slate's medical bills are killing the quarries profits! All these factors will lower one take home W-2 pay. I estimate about a 10% reduction. Also the 40% increase in diesel, has cut the quarries profit in half. Mr. slate will have to reduce wages to stay competitive.
Home equity financing:
This is another important factor for the past 5-7 years. As home prices skyrocketed, homeowners all over the US, tapped into these large equity increases, by taking out 50-70K home equity loans at historically low interest rates. This is completely gone. Even worst, the Flintstones now have to really start paying back + interest on their HELOC's. A new stylish wardrobe for Wilma in not in the cards for 2008!
Today housing numbers are very grim, and accelerating to the downside. Existing home prices are falling at rates not seen since the great depression. Also the credit/financial system is broken, with credit being pulled from the best credits. Many oil and gas firms are having their revolvers pulled! - with record oil prices!
This has direct impact, and of course secondary impacts. Coal, Oil, and gas prices have doubled in a year. NG prices are still a deal only up 50%. I just received my notice of a 25% increase from my electric utility in Durango, CO. This utility uses NG, which has gone up the least.
The town of Bedrock has it even worst. Not being a forward thinking town, more like a stone age town, This town uses heating oil for its power generation. Bedrock is thinking about building a pulverizing coal power plant, but with the 100% increase in coal prices over the past 2 years, this does not help much. Fred and Wilma can expect a 25% increase in utilities in 2008, and 40% increase in auto fuel(Nike sneakers?).
Everyone in the US will start to get 20-40% increases in utility bills over the next 12-24 months IMHO. There is a lag, most utilities that use coal, signed long term contracts for coal, so as coal has doubled, many utilities still pay low prices. The contracts are now expiring or about to expire. These utilities are trying to get new long term coal contracts - but they cant.
The coal demand from China is huge - and china pays higher spot prices. New coal contracts will cost 100% more than those signed just 3 years ago.
We all know that auto Gas is eating into ACD, but these new electric bills will have the double whammy really reducing ACD. The triple whammy hit consumers as all products consumer buy will go up as all US businesses must pass these new higher electric rates to consumers.
Food and clothing
After the US backed subsidy for corn based ethanol, the town of Bedrock saw a great opportunity for balancing its budget. The town worked with all the wheat, and soybean farmers and convinced them to just grow corn, then sell it to the refiners to help reduce our dependence on oil, and get that nice fat subsidy!
But now Bedrock is seeing that the energy needed to fertilize, water, grow, harvest, then distribute the Corn, is more than the energy content of the resulting ethanol - ouch!. Now bedrock has a bigger problem, There is not enough food to feed it citizens. Bedrock is thinking of Fred and others to go on a diet, but this plan has not been well received. So Bedrock has contracted with Mexico, and China to import food into town, but this means paying over 20% more than before.
Here is the Flintstones monthly income statement, and the income statement in one year:
Category Current monthly Change Future amounts
Take home W-2 wage $4,000 ($400) $3,600
Home equity infusions $750 ($900) ($150)
Total take home cash $4,750 $3,450
Auto loan expense $500 $0 $500
Utilities $300 $100 $400
Auto expenses $500 $150 $650
Food $1,300 $200 $1,500
Misc expenses $500 $100 $600
Total expenses $3,100 $3,650
ACD $1,650 ($200)
I have advised that the Flintstones need to change, unless they want to go bankrupt. First Fred needs to change out those granite wheels on his rig. I was thinking maybe pumice or limestone since they don't weight as much.
Another grim change may be in store for Dino - he does consume a lot of food. I have heard if grilled properly, dinosaur takes just like chicken. I have also advised the Flintstone's not to eat out, and no more new clothing, until economic conditions improve!
Back to the rest of the US. I will continue to underweight consumer discretionary. I am bearish on restaurants, higher end supermarkets, and any clothing firms. These firms will have a difficult future spending environment for up to 3 years IMHO.
I also visited the quarry yesterday. There is some good news. Mr slate used to have to compete with aggregates from Mexico, but with diesel prices so high, These foreign firms can't afford to move the very heavy product into the Bedrock market, allowing MR. slate to pass on his higher cost to the consumers.
Based on this I still like firms like the Bedrock quarries that have either pricing power(steel), or firms that benefit from inflation(energy). I do hope that America's favorite family can keep their heads above water, and I do hope all turns out well for Dino.....