Off topic - NYT piece on U.S. consumption fueling whole world now.
June 20, 1999
MARKET WATCH
U.S. Shoppers Shoulder the Weight of the World
By GRETCHEN MORGENSON
NEW YORK -- Everybody knows that the American consumer has been
the high-octane fuel behind the nation's decade long economic boom.
Retail spending, after all, accounts for two-thirds of the output of the
United States.
But it is becoming increasingly apparent that American shoppers are also
fueling the recoveries just starting to be charted in depressed economies
overseas. And this alarms James W. Paulsen, chief investment officer of
Wells Capital Management in Minneapolis, who believes that a slowdown in
consumption here could stop the improving economies elsewhere dead in
their tracks.
"The American consumer has taken the globe from deep contraction back to
flatness to recovery," Paulsen said. "If he slows down at all, we're going to
feel the world weak again."
Evidence of just how dependent the world has become on the American
consumer shows up in this country's imports as a percentage of the growth
in world output. In 1995, such imports were about 4 percent of the industrial
world's gross domestic product. Today the figure is 7.5 percent; fully 1.5
percentage points of that gain has come since the Asian crisis began.
So while the economic turmoil overseas was a nightmare for the rest of the
world, it meant a big windfall for Americans as prices of goods and money
dropped. And much of that windfall was spent at the mall.
People have been baffled, Paulsen said, about "why auto sales are off the
chart, why housing sales are so strong."
His answer: "We were dropping the monthly prices of those things
dramatically, because interest rates kept falling. Deflation drove the unit
growth of these things through the roof." The accompanying chart shows
the relationship between declining inflation and surging retail sales, excluding
autos.
But almost all of this has reversed in recent months. And that, Paulsen said,
poses a threat to American stocks.
While retail sales remain red-hot -- up an impressive 1 percent in May -- they
are sure to slow in coming months. That's because the major factors
stimulating consumer spending have disappeared.
Interest rates, for example, are no longer falling, which means American
homeowners' harvests of cash from refinancing their mortgages are history.
Oil prices have risen as well, removing another piece from the prosperity
puzzle. Perhaps most important, annual growth in real wages has fallen from
about 3 percent early last year to around 1.5 percent.
Unfortunately, if the American consumer snaps his wallet shut, there is
nobody out there to take his place in fueling the world's economic growth.
Europe is showing only 2 percent growth in GDP, and economies in most of
Asia and Latin America are either flat or contracting. Moreover, investment
by corporations is expected to be static this year.
Add to this mix a move by the Federal Reserve Board at the end of June to
increase interest rates, and Paulsen thinks corporate profits may be hurt and
economies around the world strained. "If the world just moves to slower
growth but doesn't crunch, it's a huge bull run again," he said. "If it really
slows down and gets into a more scary scenario, then the whole stock
market gets into trouble."
Copyright 1999 The New York Times Company |
