15 September 2009
United States Looks for Sources to Drive Economic Growth
Public infrastructure spending may fill the gap left by reluctant consumers
Washington — In a cartoon featured on CartoonStock.com, a man standing in front of the “Missing Persons” service window asks: “What happened to consumer confidence?”
The background is this: The Conference Board Consumer Confidence Index hovers around historic lows. The American consumer, whose spending has fueled economic growth in the United States and around the world for years, is, in fact, mostly missing in action.
THE END OF EXUBERANT CONSUMPTION
Between the late 1990s and 2007, growth in U.S. consumer spending was driven primarily by appreciation in home prices, low interest rates and the ease of obtaining credit. Americans tapped their home equity and other forms of credit to finance purchases of goods and services. But their shopping binge ended in 2007, when home prices started sliding and easy credit dried up. By the end of that year, the American consumer woke up with an economic hangover: $14 trillion in (mostly paper) wealth losses, household debt at 133 percent of disposable income from 90 percent a decade earlier, and personal savings as a percentage of disposable personal income at close to zero from 3.5 percent in 2001.
Faced with this reality, consumers closed their wallets, causing a precipitous fall in spending and fueling recession. Many Americans focus these days more on cutting debt and boosting savings than on Internet bargains or sales at a nearby retail mall. This is a trend that is long overdue and likely to last for some time, according to many economists. It can make growth less robust but more sustainable in coming years, they say.
As most “baby boomers” (those born from 1946 to 1964) pass prime consumption ages, their interest in buying things diminishes. According to a March poll conducted by the McKinsey Global Institute, more than half of American consumers plan to hold down spending even when the economy recovers.
WHERE WILL GROWTH COME FROM?
New sources of economic growth will be needed in the medium term and longer term to compensate for weaker U.S. consumer demand, according to many experts.
Public investment in infrastructure is the most promising avenue in the near term, according to Sherle Schwenninger of the New America Foundation, a policy research group. Shoring up infrastructure can create demand, jobs and income in the short run, and help boost productivity in the long run, he said. Higher productivity, in turn, may push up incomes high enough to support stronger private spending and even more saving in the future. Every $1 billion in federal highway spending generates more than $6.2 billion in economic activity, according to the U.S. Transportation Department.
But infrastructure spending is costly. According to several economists, spending as much as several trillion dollars over the next decade may be required to bring basic U.S. infrastructure up to world standards. Desmond Lachman of the American Enterprise Institute, another policy research group, worries about the growing role of the government in the economy and the staggering magnitude of the public investment being considered.
A huge national debt stemming from increased infrastructure spending, the (possible) coming costs of health care reform, and the 2008 economic stimulus spending are likely to bump up long-term interest rates, which in turn will dampen private investment, he said. The federal deficit is projected by the White House to jump to 11 percent of gross domestic product (GDP) in the fiscal year that ends September 30 from just 3 percent a year earlier. The national debt will nearly double over the next 10 years to $23 trillion — or 76.5 percent of GDP, the White House said. Large U.S. fiscal deficits also worry the Chinese. As the largest holders of U.S. Treasury bonds, the Chinese are concerned that those deficits will further depress the U.S. dollar and the value of their holdings.
Schwenninger said that in the long run, economic growth can be derived from U.S. technology exports. Demand for high-tech goods and services will come from emerging economies once the pressure for wage increases forces companies in those economies to seek productivity gains, he said. Such a development would benefit U.S. companies leading in productivity-enhancing and energy-saving technologies.
WILL AMERICAN CONSUMERS JOIN THE PARTY AGAIN?
But do not dismiss American consumers quite yet. The McKinsey Institute says most of those behaving more frugally have acted by choice, not by necessity. They may come back to the party when economic conditions improve. This is true because no one else is ready to replace them, said Daniel Gros, the head of the Centre for European Policy Studies in Brussels. “Global growth is likely to remain weak until the U.S. consumer recovers,” he said.
The Obama administration and most U.S. economists believe, however, that much of future consumer demand should come from elsewhere. “The rebuilt American economy must be more export-oriented and less consumption-oriented,” according to Lawrence Summers, Obama’s chief economic adviser.
Lachman is concerned that export-driven economies are waiting for the U.S. economy to recover and drive global growth again. This is unlikely in the near term, he said. False hopes of the U.S. consumer reemerging as the economic locomotive may actually delay U.S. and global recovery. They could prevent China, Germany, Japan and others from reforming their own economies and boosting their own domestic demand, Lachman said.
