The new president will face an unfamiliar problem: Lenders are discouraging Americans from pulling out their plastic.
As investment guru John Mauldin writes in his most recent newsletter, whoever gets elected president on Tuesday will face a huge economic mess. Mauldin, a former member of the executive committee of the Texas Republican Party, believes Barack Obama will win. But he doesn’t envy him the job.
Here is what faces President Obama. The economy is in a recession that is getting worse by the day. This is the first consumer-led recession in 27 years. Unemployment is rising and the time between jobs is probably over ten months by the time he takes office. The U.S. deficit is likely to be soaring above $500 billion. Consumers are retrenching, hit by the double whammy of falling home prices and seriously lower stock values and retirement savings.
You will not have the luck of George Bush to have consumers borrow $500 billion a year from their homes and resort to a negative savings rate. Banks will be cutting back on consumer lending, and consumers will be cutting back on spending and increasing their savings.
Home Depot Inc., Sears Holdings Corp. and other retailers may lose as much as 8 percent of their holiday sales this year because lenders and stores are clamping down on financing.
Almost a quarter of shoppers say banks cut the spending limits on their credit cards, according to a survey by America’s Research Group, which also provided the sales-loss estimate. More people are being rejected for new cards, hurting sales for bigger purchases. Demand is being pinched just as retailers prepare to enter the holiday selling season, which accounts for as much as 35 percent of their annual revenue.
And why are banks tightening the screws on the poor consumer? Another tidbit from Mauldin’s newsletter is awfully suggestive. According to Greg Weldon, publisher of Weldon’s Money Monitor, McDonald’s is now “the second largest ‘merchant-vendor’ for credit card use.”
This suggests that many consumers are in serious distress when they need to get their $4 Big Mac and fries with a credit card.
Exactly. If people are resorting to their credit cards at McDonald’s, then maybe it isn’t the smartest bet to raise their credit limits so they can go crazy at Christmas.
If Barack Obama is elected the next president of the United States, there will be much rejoicing among the people who voted for him. But it might not be the best time to pull out your plastic and splurge in celebration. The retrenchment that is coming will be brutal, and no president, no matter how seemingly transformative, will be able to do much to ease the short-term pain.
UPDATE: Numerous readers have pointed out today that many McDonalds customers use their debit cards to pay for meals, and it is not clear from the Weldon citation whether the “merchant-vendor” designation includes such payments.
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