Consumption -- Recovery Leader or Potential Profit-Killer?
by Kurt Richebächer
gold-eagle.com
"...The underlying basic fact is that Americans, in the aggregate, have been spending and continue to spend in excess of their current income. What is wrong with that? Why should excess consumption strangle economic growth? The short answer is, consumer spending in excess of income inherently means also in excess of production, and this part of consumer spending essentially emigrates to foreign producers, adding nothing to the U.S. GDP..."
America's economic recovery and its likely strength have been and remain the central preoccupation in economics around the world. In the consensus view, the U.S. economy will record in this year's second half its strongest pace of growth since the late 1990s. According to a monthly survey of 53 economic forecasters conducted by the Wall Street Journal Online, its seasonally adjusted annual growth rate during the current quarter will be 4.7% and 4% in the fourth quarter.
Consumer spending, propelled by the housing and mortgage refinancing bubble, is supposed to lead the recovery. It is growing, yes. But even here acceleration is completely missing. There were temporary boosts from promotion programs by the car manufacturers and also from tax cuts and tax refunds, but there always followed a new relapse.
Consumer borrowing is on the rampage as never before. In 2000, at the height of the bubble, it increased by $558.8 billion. This accelerated during 2001, the recession year, to $614.6 billion, and in 2002 to $771.8 billion. During the first two quarters of 2003, it has further soared to $837.2 billion and $1,000.2 billion, at annual rate.
The debt binge is working, for sure. But on closer look, we notice that more and more debt produces less and less consumer spending.
The fact is that the growth rate of consumer spending during the past fours quarters (2.9% y-o-y) is far below its average rate of growth (more than 5%) in prior post recession periods.
It is true that creating the greatest consumer borrowing binge, as well as the greatest monetary and fiscal stimulus, in history has so far prevented a deeper recession in the United States. However, this bubble has rapidly diminishing effects, and above all, it has completely failed to induce an accelerating upward movement. All the acceleration in real GDP in the second quarter that is being hailed as proof of an ongoing recovery has come from government spending and the hedonic pricing of computers. Take the two away, and there is more economic sluggishness.
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