Forum Archive Index - June 2001

["Peter" <pmaiden@xtra.co.nz>]

Gerry - you shouldn't have bought up the subject of the US consumer.

 

The approach by the Fed seems to be to get US to spend their way out of (or avoid) a recession.

 

I find it quite amusing that many economic commentators have labeled the US consumer 'heroic'  - and continue to praise consumers 'heroic efforts' in stopping the country's slide towards a recession.

 

However these same 'herioc' US consumers are also pitted against the dark force of shriveling net worth.

 

Stats out recently show that during the March 2001 quarter US consumers recorded a 8% decline (on a year to year basis) in net worth. This is the first decline recorded in total US consumer net worth since the early 1970's. US consumers are not used to seeing their net worth diminishing.

 

In spite of this US consumer spending is still rising - but are these 'heroic' consumers still in denial? A drop in consumer net worth usually signals reduced consumer spending. The probability is that US consumer spending will fall soon.

 

Like corporate America the US consumer has also borrowed heaps more. Short term ( not including mortgages etc) household debt has increased from 18% of disposable income to 22% of disposable income over the last few years.

 

Interest payments on this debt alone is nearly 4% of disposable income.

 

Even more frightening is that the level of private debt in the US is now 150% of nominal GDP - at unprecendented high levels.

 

One day the creditors may want their money back.

 

It seems unlikely that these 'heroic' US consumers will stop the US economy sliding into a period of lower GDP growth.

 

This current period of low economic growth in the US has been driven by incredible amounts of corporate capital spend ( funded by debt). The outcome of this capital spend was unexpected - lower productivity and high levels of under-utilized capacity.

 

The 'heroic' US consumer did not keep up with supply.

 

The US economy is hanging on for dear life. No doubt some more hefty rate cuts will boost short term activity but it appears that the inevitable decline into a sustained period of low economic growth cannot be avoided.

 

What  happens in the US does impact upon our own well being -  we are exposed if a sustaind downturn in the US does happen.

 

However what the US is facing up to is that they have lived beyond their means for a bit too long.

 

But isn't that what this country has been (and continues to do so) doing for decades - and we manage to struggle on.

 

Maybe others have a view.

 

Cheers

 

Peter