I’ve never been fond of the distinction that folks make between Main Street and Wall Street, as if there were some actual divide between the “real” economy and the “financial” economy. My hunch is that the correlation between the performance of our financial institutions and the performance of our economy is fairly strong (and positive). And if anything, that correlation is becoming stronger as we move toward an increasingly service-based economy (with more than 80% of our economy now devoted to services).
Nevertheless, if there was ever a company that speaks to the general health of our economy, it is American Express (AXP). Amex is a consumer and business finance company, and scrutinizing the behavior of its customers can provide insight into the direction of the broader economy. So where the adage once was, “As General Motors (GM) goes, so goes our economy”, my guess is that could be changed to, “As American Express goes, so goes our economy.” After all, consumer spending accounts for something like 70% of GDP.
Don’t get me wrong. I am not troubled by what Kenneth Chenault said. Just the opposite. I applaud him for being honest about current conditions. Rather, I was troubled by the content, and what it likely means for the U.S. economy.
As reported by Bloomberg:
American Express Co., the biggest U.S. credit card company by purchases, fell the most in New York trading since the Sept. 11, 2001, terrorist attacks after earnings missed analysts’ estimates and the lender withdrew its 2008 forecast.
Chief Executive Officer Kenneth Chenault said yesterday in a conference call that the business climate was “much weaker” than earlier this year and American Express was hurt in the second quarter by rising U.S. unemployment and falling house prices.
“Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades,” said Kenneth I. Chenault, chairman and chief executive officer. “Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations.“
“In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6 percent earnings per share growth. That outlook was based on business and economic conditions in line with, or moderately worse than, January 2008. The environment has weakened significantly since then, particularly during the month of June.”
“Over the past month or so, we have seen clear signs that the US economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades, and consumer confidence is at one of its all-time low points. Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.”
“Affluent customers in some situations are cutting back on discretionary spending…we’re seeing a slowdown in spending across the board…The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behavior. Not just as it relates to mortgages and home-related spending, but also across the full spectrum of the consumer economy…we now believe the economic weakness in the US will likely worsen throughout the remainder of the year…” (emphases added by Calculated Risk)
Given this information, my expectations are that the chances for a second-half rebound are extremely remote, irrespective of what happens to oil prices (see Mish’s excellent posts on Deflation here and here). Moreover, I now expect conditions similar to those experienced by Amex to spillover to a broader swath of corporations, not limited to housing, finance, and consumer discretionary.
For me then, this news speaks to the breadth of impact that we should expect from this recession - on both Main Street and Wall Street. My call therefore is still for long-and-deep versus short-and-shallow.