Lower earnings, pensions, hit US consumers

US earnings Oct11.pngWall Street analysts have their bonuses to consider at this time of year. So it is no surprise that they are talking up the prospects for the Christmas season – the peak shopping period of the year in the West.

But those involved in shipping goods don’t see the same rosy picture:

• In August, Bloomberg reported that container shipping rates from Asia to Europe were suffering “the longest stretch of near-zero rates in its half-century history”, as retailers cut back on orders
• Now, the New York Times reports that imports via the 5 busiest US container ports “were lower in August than, or even with, 2010 volumes”.

This should be no surprise, given the above chart, again from the NYT. It shows that median US incomes fell 9.8% between December 2007′s start of the Great Recession and June 2011, according to new Census Bureau data. This includes a 6.7% fall since the official end of the recession.

The Census Bureau describe this as the largest decline “in several decades”. They add that it evidences “a significant reduction in the American standard of living.” And if this wasn’t enough to restrain Holiday spending, Western BabyBoomers (those born between 1946-70) are also becoming aware that their pensions are under increasing threat.

Most US public pension funds use an 8% assumption when they come to assess likely returns on their investments. But as the Wall Street Journal warns, this figure is now hugely over-optimistic:

• It was reasonable during the Boom-led SuperCycle after 1980, when demand for assets like stocks and housing soared
• But as we note in Chapter 5 of the free Boom, Gloom and the New Normal eBook, the key S&P 500 Index actually fell between 2000 – 2010
• None of the large US state pension funds with >$20bn saw more than a 4% annual return for the decade through June 2010

The pension funds are now between a rock and a hard place. Either they cut promised benefits to pensioners, or they increase taxes/employee contributions. Both mean US consumers will have less cash to spend.

One example from the Centre of Retirement Research highlights the scale of the crisis. It suggests that states with large unfunded liabilities might see pension costs rise from 3.8% of state and local government budgets in 2008 to 12.5% by 2014.

Any business managers who believe the analysts’ forecasts could face a difficult New Year, if these prove to have been wishful thinking.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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