For years, the U.S. consumer carried the country's economy and acted as the spender of last resort for the rest of the world.
But the consumer spending joy ride is over, and consumers are not likely to reverse their behavior until 2010, says Diane Swonk, chief economist and senior managing director at Mesirow Financial.
"We are not likely to see consumers become a major driver of overall economic growth until well into 2010," she recently wrote in a note to investors.
Excessive, easy credit provided the bulk of support for consumer spending, especially in the housing and vehicle market. But that began to change last year. Consumer spending has only been expanding at 1.2 percent in the last year.
Swonk estimates consumer spending growth will contract to minus 0.8 percent and minus 1.8 percent in the third and fourth quarters, respectively.
One of the main factors that are exacerbating already deteriorating consumer balance sheets is the end to the federal tax rebates.
"Real disposable income is deteriorating now that the tax rebates have been spent," says Swonk.
In addition, says Swonk, consumer confidence in the economy has deteriorated even faster than overall economic conditions would suggest, although it did rebound slightly in September from August because of the continuing drop in gas prices at the pump.
What would it take to get consumer spending to reverse course and rise in the fourth quarter? Swonk suggests that oil prices would have to drop to the $75 a barrel range before the end of September, and stay there for the duration of the quarter.
She notes that this is highly unlikely in the near-term, since OPEC already announced plans to cut oil production by about half a million barrels a day and will curb overall output through quotas.
Prospects for 2009 are only a bit better, she says, as the conditions that fed the housing market crisis start to abate, and the traumatized credit markets start to heal.
A rebound in profits should also eventually make its way into jobs and wages over the course of the year, says Swonk.
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