25 September 2009
U.S. Consumer Spending on Long Path to Recovery, Forecasters Say
Newly frugal consumers seen likely to resume spending at lower rate
Washington — The worldwide financial crisis and an economic recession that began in 2007 in the United States have prompted a return to frugality among American consumers, leaving countries that rely on exports to the U.S. market wondering when U.S. consumer spending will rebound, according to two economists.
The two participated in a discussion on “the future of consumption as an engine of growth” that was broadcast September 23 from an America.gov studio in Washington to audiences in Beijing and Wellington, New Zealand. Their views differed when they discussed past consumer behavior, but they agreed on future trends. While U.S. consumers are unlikely to return to the liberal spending habits of the years directly preceding the recession, their demand for goods and services will pick up as the job market recovers, a process likely to take two or three years.
“It’s going to be a very volatile kind of recovery, a very weak recovery by historic standards,” said David Cross, president of Market Outlook, a San Diego–based consulting firm. “Probably in a couple of years we’ll all be talking about the great rebound in the American consumer, the consumer we all thought was dead.”
The drop in housing and stock markets cost U.S. households more than $10 trillion in wealth over the last year and a half, Cross said.
“Having been through the trauma of the last year, it’s a different [consumer] mind-set, a more conservative mind-set,” said James Meil, chief economist at the Cleveland-based Eaton Corporation, one of the world’s largest manufacturers of hydraulic and motor-vehicle equipment.
In recent history, U.S. consumer spending — which makes up more than two-thirds of gross domestic product — grew 3 percent to 4 percent each year. The new normal rate will look more like 2 percent annual growth, according to Cross, who advises executives at international companies on how economic and demographic changes affect future sales and profits.
The United States will not see any significant and sustainable job growth until the end of 2010, which will set the stage for consumer spending to rebound, he said. After that, the recovery will depend on the state of the job market and on the availability of credit.
Two key factors buoy the medium-term outlook for U.S. consumer spending. First, the United States is the only developed country that expects its population to grow — the rate will be roughly 1 percent per year in the coming decade. “That positions the United States as the star in terms of the consumer marketplace,” Cross said.
Second, the demographic bulge of 80 million older Americans known as the baby boomers (born 1946–1964) reaching retirement age is expected to display different old-age spending habits than did previous generations. As they will live longer, they likely will work longer — possibly into their 70s — and thus continue to buy more goods and services than their parents did at the same ages, Cross said. Meanwhile, a younger generation — another 80 million people known as Generation Y — will be entering the family-formation stage of life and spending more on homes, cars and children’s goods.
At the same time, over the next five to 10 years, the world economy increasingly will rely on growth in emerging markets such as Brazil, Russia, India and China, according to Meil, who won first-place in a Wall Street Journal’s economic forecasting contest.
“Most of that recovery will be driven by the high-growth, high-potential countries. ... They’re at a stage of development where there’s a higher propensity to spend upon material goods,” like automobiles and higher-value foods such as meat and dairy, he said.
The number of motor vehicles produced and sold in China reaches 10 million a year, two-thirds the size of the 2007 market in America or Western Europe. “China’s pretty much there, right now, today, as a premier motor vehicle market,” Meil said. If 250 million Chinese migrate from rural to urban areas in the next two decades, as Meil expects, consumption potential will increase immensely.
Still, Chinese consumers should not be depended on to become the sort of spending powerhouse the United States has been, Cross said, because the Chinese save 30 percent to 50 percent of their income, compared to a savings rate of 4 percent to 5 percent in the United States. Until Chinese households have more money to spend and fewer incentives to save, “the Chinese consumer is ill-equipped to carry the burden of the world economy,” he said.
So in the near future, the American consumer may be the only hope for a robust recovery. Once the job and credit markets rebound, the current roller coaster ride will fade into memory, Cross and Meil said.
“We’ll return back to something close to normal,” Meil said. “It won’t be 2006 or 2007 relived. We won’t be able to borrow money the way we did. Credit markets will look a little bit different, but we’ll recover okay. So, it [has been] quite a nightmare. But we’ll wake up, and we’ll be okay.”
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