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Global View: America's consuming passion
By Ian Campbell
UPI Economics Correspondent
Published 3/4/2002 9:42 AM
The recession is over, isn't it? Despite all those gloomy prognostications, the U.S. economy is "turning around." The U.S. consumer, like a frontier pioneer, stood brave and strong--and kept on buying unstable Sports Utility Vehicles, room-size televisions, takeaway meals, large bags of LOW-FAT pretzels and the other bare essentials of life, so that gloomy economists, like this one, rather than the president, can choke on their words. But wait! There may be more to say.
First, some much-trumpeted and therefore almost familiar data, released Thursday. In the fourth quarter of 2002 the U.S. economy grew by 1.4 percent from the third quarter (at an annualized rate: the quarterly change in gross domestic product raised by the power of four.) That was, on the face of it, a good number, much better than even the positive analysts expected. The U.S. economy is saying good-bye to recession. But when we look deeper into the number, some of the signs are disturbing. We can see how much America leans on its rock-solid consumers. It owes to them all its economic growth in the fourth quarter, and some more.
Personal consumption grew much more than the overall economy in the fourth quarter, contributing 4.1 percentage points to GDP growth in the fourth quarter. (Other components subtracted from GDP growth.) Spending just on durable goods--for which read SUVs, room-sized televisions etc--rose at an annualized growth rate of 39.2 percent and supplied no less than 2.8 percentage points of overall GDP growth. Yes, put up a zero interest financing sticker and the American consumer can swallow his pretzels in a moment, fall off his couch and run--sorry, drive--to the car dealer in no time.
But the rise in private consumption was totally offset by a 4.1 percentage point fall in private investment, whose annualized quarterly growth rate was an enormous, minus 23.3 percent. Investment spending is being hammered. It has fallen in seven of the past eight quarters and dropped by 8 percent in 2001 as a whole by comparison with 2000.
If, in the fourth quarter, rising private consumption and falling private investment offset one another, where did the 1.4 percent growth come from? It came from government spending, which rose at an extraordinary annualized rate of 10.1 percent in the fourth quarter, contributing 1.75 percentage points of the GDP growth total. The small difference between government spending growth and total GDP growth is explained by a small decline in so-called net exports: US exports declined by a bit more than U.S. imports.
Growth of 1.4 percent is a long way from recession and was seen by Wall Street as being healthy. Having taken a little time to swallow the news, the Dow Jones Industrial Average soared by 2.6 percent Friday. If Americans keep spending the economy will be alright: this has become the new mantra of business economists. Indeed so. But will America's consumers keep spending?
To think about this, we might enquire into a mysterious disappearance: whatever happened to the "negative wealth effect"?
In the second half of the 1990s, it was argued--rightly, this correspondent would say--that rising stock assets and real estate prices made Americans more ready to consume. This was the "wealth effect."
The "negative wealth effect" was payback time; it referred to the hit that consumption might be expected to take when asset prices fell. Now the negative wealth effect has disappeared from the debate, has become, presumably, one of those threats that are spoken about that amount to nothing, like the advent of Year 2000 when everything from computers to airplanes was expected to come crashing down. Yet the negative wealth effect, in this correspondent's view, is still going to be felt, and will be important.
To see how important it could be, you need to look at the size of the original wealth effect. In the four years from 1996 to 1999, Fed figures show, so-called net household wealth rose by $14.65 trillion. (That is about one-and-a-half times as much as current annual U.S. GDP.) The wealth effect was huge.
Now, it should be made clear, this was not money in Americans' pockets. Rather it was money in their bank and investment accounts and pension funds and property.
The biggest contributor to the increase were gains in stock prices. Meanwhile rises in real estate prices contributed $1.8 trillion. Thus an American whose stock market investments and pension fund (and stock options, perhaps) had doubled or trebled in value in a few years, and whose house was now worth half a million dollars rather than the $300,000 he paid for it, felt much better off and more financially secure, and was therefore much more inclined to indulge in a second car, packets of pretzels, and other essentials, as carefully analyzed above.
The spectacular gains of the stock market ended in the first quarter of 2000. Since then the Nasdaq has lost two-thirds of its value. In the numbers for net household worth the effect of this can be seen. But, interestingly, it is only in 2001 that the fall in wealth becomes pronounced. In 2000 net household worth dropped by a mere $526 million, just 3.6 percent of the run up in the previous four years. In the first three quarters of 2001, however, the fall in net household worth was $2.6 trillion.
Yet one influential component of net household worth kept rising even in 2000 and 2001. The continuing property boom meant that households' real estate gained in value by almost $1 trillion in 2000 (roughly one-tenth of U.S. GDP), and by a further $657 million in the first three quarters of 2001. Here is a Campbell mantra: own even more absurdly valued house, will spend.
In America's homes the boom of the second half of the 1990s has not ended. And though consumer confidence surveys show a marked decline over the past two years, Americans have kept spending. But manufacturers have had to do more to entice those sales. The remarkable 39.2 percent annualized growth in the fourth quarter in the GDP for durable goods reflected bargain prices and zero interest rate financing for cars. Does this not represent a last hurrah for the car industry? Unless there is an extraordinary turnaround in the economy, what can companies do to keep consumers buying?
And what does all this point to?
Growth in which consumption and government spending are the bastions and private investment is tumbling is about as healthy as a packet of pretzels. At some point, consumption must come down. And that, in turn, will keep company investment (and employment) and economic growth, and the stock market, under pressure.
A good reason why consumption not only will fall but needs to fall emerges from those figures for household net worth. Even with house price gains continuing to enrich Americans, their liabilities (chiefly mortgages and consumer credit) rose by 50 percent between end-1996 and the third quarter of 2001 while their assets rose in value by just 32.6 percent. What analysts sometimes call "personal balance sheets" must be repaired. Americans need to borrow and spend less, and save more. When they do so, and not before, the American economy will begin to be repaired; the trade deficit will decline; the foundations will be laid for a solid recovery.
And so, do not expect the consumer to buoy up the economy much longer. America's consuming passion must in the end consume itself.
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(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the U.S. economy. It normally appears on Friday; this edition was delayed by catastrophic computer failure. Comments and offers of technical guidance on computing to icampbell@upi.com.)
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