Since returning to reality from Australia I can’t help but notice an uptick in business conversations about how bad things are in the US and how it will affect Canada. Until now, my observation was that those in the financial services businesses were fully immersed in the issue but other business leaders weren’t registering direct concerns. I would say that’s changed.

Yesterday I got a copy of a Merrill Lynch (US) analysis that summarizes their view of how bad things are/might be. Keeping in mind that over-reaction might always be a reality in both good times and bad (maybe it is, I don’t know), this analysis is starkly negative.

Their view is based on the simple notion that what the US is facing is a credit contraction and that there is little doubt the consumer – up until now the primary engine keeping the US economy afloat – is about to go AWOL. The bottom line impact? As the report says “for global producers who sell $2.3 trillion of goods and services the US, 70% of which is geared to the consumer class, to be forewarned is to be forearmed – find a new customer somewhere else in the world”.

Here’s some of the thinking on what’s happening:

> boomers have spent their adult years using credit, backed by the unstoppable increases in the value of their homes to live beyond their means

> savings have dried up (personal savings rates in the US are close to zero, down from over 10% in 1985)

> boomer retirements, which are just around the corner, were to be funded to a very large extent by home equity

> with house prices going the wrong way now, financial debt exceeds financial assets for many boomers – this is driving severely contracted spending on everything – from mortgage and other financial obligations (debt) – to home renovations and most other discretionary spending (everything but food)

> boomers who can no longer able to count on the value of their homes, will finally start saving for retirement

> with foreclosures, late payments and delinquencies soaring, credit providers are upping the hurdles and severely restricting credit that is available to consumers

> with more savings and less available credit, the drag on the economy will be intense. The author concludes: “we have identified the very serious economic issues that could make this recession much more problematic than previous post-war setbacks”. Maybe the sky is falling.

Some numbers from the analysis:

> household liabilities absorb over 50% more of after tax personal income than it did 20 years ago – when interest rates were double what they are now

> the household debt-service ratio is 14.3% close to a record high

> the personal savings rate is .05%, almost a record low

> 1/3 of non-traditional mortgages are already in default

> 39% of people who bought a home in the US last year now find their mortgage is larger than the value of their home

> credit card approval rates have fallen to 32% from 40% a year ago – direct mail solicitations (remember those) to lure new customers are down 16%.

One of the things I’ve heard some say here is that inflation in the US will be a problem because of the rapid and high prices we’re seeing in raw materials like oil and wheat.

This analyst doesn’t buy it – having determined that inflation is driven by $ in the end-users pocket. Their belief: “in the absence of of a willing purchaser, higher input prices would simply come out of profit margins at the wholesaling and retailing levels”. That makes sense.

I don’t know whether the sky is falling or not. I’m not an economist – and frankly its not clear being an economist is much help. However, I do find it logical that the US consumer is in deep dooh dooh. With house prices imploding and credit companies restricting available credit, I don’t find it much of a stretch to think that there will be a significant negative impact on business. It will be very interesting to watch what happens over the next year.