Ailing U.S. consumers might foreshadow recession

By Jonathan Stempel

NEW YORK, Nov 8 (Reuters) - As the U.S. credit crunch wreaks havoc throughout the financial industry, some worry it might herald a coming recession.

Executives and analysts at the Reuters Finance Summit this week expressed concern that consumers already straining under high-cost home loans may soon start falling behind on credit card and other payments. They said this could cause damage to the broader economy, and perhaps cut deeply into bank profits.

"My concern is more the consumer at this point, given what's happening in the housing market, and the knock-on effect that might have on consumer spending," said Robert Kelly, chief executive of Bank of New York Mellon Corp (BK.N: Quote, Profile, Research, Stock Buzz).

"I won't say the odds (of recession) are higher than 50-50, but I think it's close; clearly, more likely now than they were two months ago."

Falling home prices, rising borrowing costs on adjustable-rate mortgages, and tighter credit-market conditions are expected to cause 2 million foreclosures by the end of 2008, Chief Economist Mark Zandi of Moody's Economy.com has estimated.

The slump is also thrashing home builders and developers, banks have said. Hovnanian Enterprises Inc (HOV.N: Quote, Profile, Research, Stock Buzz) and Toll Brothers Inc (TOL.N: Quote, Profile, Research, Stock Buzz), two large home builders that cater to wealthier customers, this week reported falling construction volumes and higher cancellation rates.

HOME NO LONGER A CASTLE

Yet while major lenders such as Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Capital One Financial Corp (COF.N: Quote, Profile, Research, Stock Buzz) have boosted reserves for or estimates of consumer credit losses, there isn't a consensus on how widely the crunch will extend -- how deeply, for example, it might affect credit card issuers.  Continued...