By Louise Keeling, director US equities at Insight Investment Despite the collapse of corporate ...
By Louise Keeling, director US equities at Insight Investment
Despite the collapse of corporate demand, the consumer kept spending. The first buds of stronger economic growth were breaking through in the summer of 2001 when the events of 11 September caused corporate America to reduce spending budgets as they faced an uncertain world.
This retrenchment of capital expenditure multiplied around the economy and retarded any recovery in demand.
Once again, the consumer remained resilient throughout this time. In retrospect, this should not have been so surprising. Rarely has the consumer had a confluence of events so beneficial: tax rebates of $175bn over the past two years; $15bn in mortgage interest savings due to refinancing and unemployment at historic low levels.
Indeed, the average household was more than $1,000 better off in September 2002 than 12 months earlier due to the lower mortgage payments.
In recent weeks, however, we have seen the buoyancy of the consumer diminish. Many companies have reported an increase in price sensitivity, a slowing of more discretionary spending and weaker mall traffic.
Overall, there is no reason to believe retail sales will be stronger this Christmas than last, although recent strength in advertising spend would suggest retailers and product manufacturers will endeavour to convince us otherwise.
Looking in to 2003, the West Coast Port Strike and subsequent go-slow has meant companies that rely on the import of Asian products may receive some of their planned Christmas stock in the new year and therefore be forced to take heavy mark-downs to clear the backlog. The price consciousness of the consumer and the resulting margin compression due to heavy promotion look set to continue.
Although of grave concern, the recent indications of a more sanguine consumer are not sufficient, in themselves, to abandon the US economy. The Federal Reserve's decision to reduce the interest rate by a further 50 basis points to 1.25% is clearly a reflection of the challenges facing the US economy.
Nevertheless, the base is being formed for improvement in some areas of the economy. For example, inventory levels at many of the semi-conductor companies are at levels that ensure any marginal increase in demand will filter rapidly through the supply chain.
In this uncertain macro environment, corporate America has been forced to focus on efficiency. Consolidations such as Hewlett Packard and Compaq, where synergies are easy to identify and the combined company is better placed to compete, are likely to become more prevalent.
With survival the primary focus of many companies, the market has begun to value the strength of balance sheets of firms whose previous successes have garnered them war chests to weather the current period and take advantage of some of the acquisition opportunities.
Market expectations of the rate and pace of recovery have become more realistic, which should foster further confidence in the US economy as signs of a recovery develop.
Market expectations more realistic.
Further rate cut by Fed.
Corporate dieting undertaken.
Uncertain macro environment.
Indications of a more sanguine consumer.
Margin compression to continue.
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