Obama's Policies and the U.S. Consumer

Over the past two weeks my colleagues have sliced and diced the Obama 10-year budget plan, analyzing the broad business impact as well as the likely effect on a sector-by-sector basis. While the proposed budget directly affects each sector in specific ways, when it comes to consumers and consumer-driven companies, the impact of the budget is both direct and indirect.

Higher Costs for Everyone
In an effort to offset massive increases in government spending, President Obama is counting on a number of net tax increases. One big one is lifting tax incentives on energy producers. In a recent Stock Analyst Note, my colleague Justin Perucki described the significantly detrimental effect this would have on independent producers. Not surprisingly, he concluded that higher taxes would inevitably be passed along to consumers in the form of higher oil and gas prices. The budget also calls for raising revenue through the sale of carbon permits, which would also likely lead to greater utility prices. In the president's own words, "under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket." If the president gets his way, it's pretty much a foregone conclusion that consumers will see much higher prices for electricity, for home heating, and at the pump.

Although agricultural commodities peaked in mid-2008, prices for food and other consumer staples remain elevated as consumer packaged goods (CPG) companies seek to regain as much of their lost margins as possible. Consumers are still paying much higher prices for Cheerios and Tide today than they were a few years ago. The president's budget calls for reductions in agricultural subsidies but does not call for any changes to the Renewable Fuels Standard. In the recent article "Proposed Budget Shouldn't Kill Big Ag's Profits", Morningstar analyst Elizabeth Collins discussed how she thinks the agricultural sector would fare in light of the president's proposals. Although she doesn't think there would be much of an impact on the agricultural sector as a whole, she takes the view that the continued diversion of corn to ethanol will support high corn prices and high prices for other agricultural commodities. The budget only supports our view that once the economy recovers, we will be back in a world of rising commodity prices that will make our everyday goods--from breakfast cereal to laundry detergent--more expensive.

Tax Relief for Lower and Middle Brackets
Although all consumers will likely see their monthly costs rise under President Obama's budget plan, lower- to middle-income consumers get somewhat of a break in the form of modest tax cuts. High-earners aren't so fortunate, as their income taxes rise and deductions fall. Morningstar associate director of economic analysis Robert Johnson discussed the specifics in his recent article, "Roadmap to the Budget Plan". More taxes on high-earning households will inevitably make them feel poorer and adjust their spending accordingly, and this isn't a good sign for luxury retailers over the long run.

1  2  |  Next Page >>

DIV style="MARGIN-TOP: 0px; FLOAT: right; MARGIN-LEFT: 7px; MARGIN-RIGHT: 0px" display: >