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America’s ‘Zombie Consumers’ Won’t be Coming Back to Life Soon
Economy watchers looking for a spark of life in the exhausted, debt-ridden American consumer are quick to latch on to any signs of a pulse and the latest came in the form of higher personal borrowing in March. The $6.02-billion (U.S.) increase marked the sixth consecutive monthly advance and was nearly three times higher than the most bearish forecasts. The best news of all, however, is that credit-card debt climbed, marking only the second such rise since the housing and credit market collapse. [Unfortunately, however,] “We’re only 20 per cent of the way there” says Stephen Roach. “The American consumer is toast – stuck with a legacy of excessive debt, inadequate saving, and facing high unemployment, higher under-employment, weak incomes and holding on to assets that are under water… [As such,] you can not rule out the chances of the world sliding back into recession.” Words: 1004
So says Brian Milner (www.theglobeandmail.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Milner goes on to say:
Getting American consumers back to their free-spending ways is the fervent hope of just about every economy planner on the planet. The old shopping habits of these once thoroughly dependable mall-people formed the very foundation on which broad Western prosperity and strong growth in China and the rest of the emerging world were built but so far, the recovering shopaholics continue a distressing pattern of retrenchment, a trend undoubtedly intensified by plunging housing values and higher fuel and food costs.
U.S. consumer spending rose only 2.7 per cent in the first quarter, down sharply from 4 per cent in the last three months of 2010. This is no trivial matter considering that the consumer accounts for about 70 per cent of the U.S. economy, down from 71.3 per cent at the pre-crisis peak. (The Canadian level reached 64 per cent last year, up from 56 per cent in 2000). The U.S. consumer share will continue shrinking until it returns to about the 66-per-cent level that prevailed for much of the last quarter of the 20th century, putting a big dent in GDP.
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As prominent economist Stephen Roach, the author …of The Next Asia [see a review here]… [and] a long-time, often bearish, chief economist with Wall Street heavyweight Morgan Stanley before turning his attention to China and other rising Asian economies as non-executive chairman of Morgan Stanley Asia, was saying the other day. “We’re only 20 per cent of the way there.”
Before the crisis, American consumption was soaring not because of income growth or rising employment but because “we levered an asset bubble. We extracted money from overvalued property – and that’s over. … Consumers are stuck with a legacy of excessive debt, inadequate saving, and facing high unemployment, higher under-employment, weak incomes and holding on to assets that are under water.” No wonder he declares that “the American consumer is toast.”
Higher exports and increased capital spending could help the U.S. economy weather the consumer’s demoralizing decline. “But I would say reduce your estimates of trend GDP growth in the U.S. over the next three to five years by at least one percentage point. That’s a big deal.” says Roach. Indeed it is and it is a shift that has not been lost on China, which has embarked on an ambitious plan to change its economic model from one focused on export manufacturing geared toward those U.S. shoppers to one centred on services and domestic Chinese consumption.
“A post-crisis generation of ‘zombie consumers’ in the U.S. is likely to hobble growth in global consumption for years to come and that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers,” Mr. Roach wrote recently in an Asian publication. “China will draw down surplus savings, its current account surplus and slow its rate of foreign-currency reserve accumulation and naturally reduce its demand for dollar-based assets” [see rearlier comments by Roach in this regard here] but on the other side of the ledger, the United States will remain stuck with the world’s largest current account deficit and a worsening fiscal and economic outlook.
[In a speech in Toronto recently Roach commented that] “The debate in Washington tells me that we don’t get it. We don’t feel the pressure or the urgency to address our savings shortfall. The budget debate would be comical if it didn’t have such tragic implications for the future of the United States.” The outcome could be “an asymmetrical rebalancing of the global economy, where the biggest surplus saver (China) moves in a credible way to boost internal private consumption [while, on the other hand,] the biggest deficit saver does very little.” [In resp0nse to my question to him as to] …whether [that would] increase the chances of the world sliding back into recession he said, “I’m not prepared to turn in my stripes as a card-carrying double-dipper…The lessons of centuries and centuries of financial history … make it very clear that post-crisis recoveries are weak. When they’re weak for a long period of time, they lack the cushion that economies normally need to withstand the blows of a shock so…I don’t think you can rule out [the chances of the world sliding back into recession].”
*http://www.theglobeandmail.com/globe-investor/why-americas-zombie-consumers-wont-be-coming-back-to-life-soon/article2014484/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Home&utm_content=2014484
Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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