As US shoppers retreat, can world thrive?
Consumers were the biggest engine of global growth. But indebtedness prevents that now.
Still buying: Shoppers wait outside a store in New York Oct. 22 to check out the new Google T-Mobile G1 cellphone. Retail sales, long an engine of the economy, are no longer the powerful force for global growth that they've been in recent years.
Mike Segar/Reuters
WASHINGTON
Buying stuff – it's been the American way. Free-spending US consumers for years have been a powerful engine for growth in the global economy.
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But a hefty chunk of that cash outflow was borrowed. Drawing against home equity and credit cards, American households since 2006 have paid out some $400 billion more than they've earned.
Now the credit crisis, plus a recession, may push US consumers to live within their means. All signs indicate that for some time to come they'll be buying fewer domestic cars, Italian suits, and Taiwanese laptops.
Who, or what, might take up the slack? Can spending by governments, say, or Chinese consumers step in and replace open American wallets as the main motive force of world growth?
"We're going to test that proposition over the next year," says Brad Setser, fellow for geoeconomics at the Council on Foreign Relations.
The US economy is the largest in the world. Within that economy, consumers are the dominant force. From Main Street to the strip mall, retail activity accounts for about three-fourths of US gross domestic product (GDP).
Over the years, debt has become an increasingly important factor in US consumer culture. From the 1960s until the early 1990s, American households saved about 9 percent of their after-tax income. Then, cheap credit plus good economic times encouraged even faster spending, and the savings rate dropped to about 3.5 percent.
Since 2005, the spending has become even more frenetic, in the sense that the savings rate has sunk to about 1 percent, according to US government figures.
"We spend too much. We save too little. And I suspect those trends are going to change," said Timothy Adams, a former undersecretary of the US Treasury for international affairs, at an Oct. 16 Council on Foreign Relations symposium.
Experts have long predicted a slump in levels of US consumer spending, only to be proved wrong as flat-screen TVs, designer back-to-school outfits, and fried burrito stackers continue to march out the door.
This time may be different. Levels of consumer confidence are as low as they have ever been, in the face of unprecedented credit turmoil and a slumping economy. Plus, the collapse of home prices has stripped owners across the country of paper wealth.
Since 2007, US households have lost nearly $7 trillion, or 12 percent, of their net worth, according to a new report from the financial analysis firm Global Insight.
Thus, it's unlikely consumers are going to pull the US, and the rest of the developed world, out of its current downturn with a fresh burst of spending.
"They're going to have to rebuild their balance sheets," says Peter Morici, an economics professor at the University of Maryland. "Savings will go up."
Real consumer spending declined in the third quarter of this year for the first time since 1991. It may resume growing again in the first quarter of 2009, but only just. Then it may wobble forward at an anemic 1.7 percent in the second quarter, predicts the Global Insight forecast.
