23 September 2009
Top American Forecasters Talk About Consumers and Economic Growth
In Focus webcast transcript, September 23
David Cross, president of Market Outlook, and James Meil, chief economist for the Eaton Corporation, discussed consumer behavior in short and long-term time spans and its effect on economic growth in a September 23 In Focus webcast.
Following is the transcript:
(begin transcript)
U.S. DEPARTMENT OF STATE
Bureau of International Information Programs
In Focus Webcast Transcript
Consumers and Economic Growth: Top U.S. Forecasters Discuss Trends
Guests: David Cross and James Meil
Date: September 23, 2009
Time: 9 p.m. EDT (01:00 GMT)
CHARLENE PORTER: In Focus is coming to you from the studios of the Bureau of International Information Programs in Washington, D.C. We’re at the U.S. Department of State. I’m Charlene Porter. Thanks so much for being with us.
We’re talking today about consumer spending as an engine of economic growth for both the United States and for the entire world, for countries that export their products to the United States. We have guests here in our studio in Washington. And we have two of our embassies around the world, who will be joining us later. They have interested parties that have come to their posts and we’ll be talking with them. They’ll be asking questions of our expert guests. But let’s start with the gentlemen that we have in the studio.
First we have David Cross, who is the president of Market Outlook. That is a San Diego—based research firm. Its clients are international companies who are looking to market their products to American consumers. David’s specialty is quantifying how economic and demographic changes affect future sales and profit. David, thank you so much for being here.
DAVID CROSS: Well, thank you for inviting me.
PORTER: All right. Also in the studio, I have Jim Meil, who is the chief economist with the Eaton Corporation from Cleveland, Ohio. It is one of the world’s largest manufacturers of hydraulic and motor vehicle equipment. Mr. Meil also has a reputation for economic forecasting. He’s received first place recognition from the prestigious Wall Street Journal for his role on a panel of 50 economic forecasters. We’re hoping that he might be able to give us some view to the future of the United States and the world economy in the next hour. Jim Meil, thank you also for being with us here this evening.
JAMES MEIL: Thank you, Charlene. It’s wonderful to be here.
PORTER: Thank you so much. All right, a little bit of background now before we begin talking to our guests. We’re talking about consumer spending and its power as an economic force. Now, consumer spending represents more than two-thirds of U.S. economic activity. It’s fueling growth here and, as I mentioned, in countries that export their goods to this country. Now, during times of economic stagnation, traditionally U.S. politicians have encouraged this spending as the best way, perhaps, to get the economy out of a slump. But some signs indicate that that may not be happening during this recession. The shoppers are not really streaming back to the malls as one might hope. A regular measure of economic activity, the Conference Board consumer confidence index, hovers around historic lows right now. And the period of expansion that ended in late 2007 was driven primarily by appreciation in home prices, low interest rates, and the ease of obtaining credit. Americans tapped their home equity during that period and other forms of credit to finance purchases of goods and services. American consumers were so eager to be spending in those days, they’d line up overnight at big-box stores, in hopes of taking in some of the bargains that might have been on hand. But, now we are in the aftermath of that spending binge and it has become clear that risky lending by U.S. banks, overborrowing by consumers, contributed to that slowdown. So frugality is gaining new popularity among many in the United States. According to a March poll conducted by the McKinsey Global Institute, more than half of American consumers plan to hold down their spending even when the economy recovers. So David Cross, that’s your specialty, those consumers. What do you see happening to their spending patterns right now?
CROSS: Well, during all economic cycles we have this pattern of consumers — as the job market begins to shrink and as their wages sag — they start to pull back. A lot of it is considered to be change in confidence, but in reality, it is very much a function of how poorly they view the job market. Confidence itself is very much a reflection of what’s going on in the job market, what’s going on in the stock market, even gasoline prices play a very important role in how people feel about confidence. What’s most important is the job market in the United States. And a lot of people, when they are asked survey questions [like] are you going to become, forever, more frugal, will say, ‘Of course, I’ve learned my lesson.’ And it happens in every economic cycle the same way. In my view, we are still, obviously, in the depths of recession, even though some indicators are pointing to the fact that the economy has bottomed out. It will be a very long time before that’s felt by consumers. Probably toward the end of next year, is the earliest that we’ll see any kind of significant and sustainable job growth. And, ultimately, that will set the stage for a rebound in consumer spending. What will hold back spending this time, compared to previous cycles is the fact that we’re still fixing the credit crunch. We’re still struggling with access to credit. And the supply of credit to fuel more spending is what will be in very short supply over the next couple of years, particularly as the credit crunch drags on.
PORTER: Now, let’s see if we can analyze it. There are several things that are at work with consumer spending. On the one hand, there’s jobs. Have people lost their jobs? And then, on the other hand, there’s people who maybe haven’t lost their jobs but they are looking at their neighbor who has. So there’s a lot of psychology going on here as opposed to, you know, the bare bottom line of how much money is in everybody’s pocket. Let’s talk a little bit about how the mindset is at work.
CROSS: Well, the mindset right now is very poor, obviously. The ability to tap into home equity, which was a major driver of consumer spending over the last four or five years, has evaporated. And, quite the contrary, we have seen destruction of about $10 trillion in consumer wealth. I think sometimes when economists throw these numbers around — trillions — so many times you hear the word “trillions” used, it reduces its value or its meaning to people. But it is a significant, obviously, a significant number. Baby-boomers, in particular, own about half of that $10 trillion worth of lost wealth. Over the next few years, what we expect to happen is that as the job market begins to improve, and as the fear is driven out of the business cycle, and as we get to that point of having more sustainable growth, I think what we can expect is that release of pent-up demand. It has been the longest recession that we have seen in the postwar period. In every other recession, what’s happened is people restrain buying a whole array of goods, they don’t feel comfortable making big-ticket purchases. We’ve seen that very much in the auto industry, which came close to collapse because of not just consumers’ unwillingness to make big-ticket purchases, but the absence of any borrowing ability as the banks pull back as well. That pent-up demand is typically what drives us out of a business cycle. The last couple of recessions that we had have been very slow recovery periods because the job market just didn’t recover very quickly. Businesses were very reluctant to hire until they saw the evidence that everything was really back on track.
PORTER: Jim Meil, let’s bring your perspective into this for a moment. How do manufacturers of large equipment feel, what’s the chain reaction that they feel in terms of this consumer reluctance, this lack of consumer confidence?
MEIL: Well, I think when we take a look at consumer behavior, our perspective — and we’re one stage removed in looking at these things from the perspective that David would bring — but we think consumers generally make good decisions, and generally make rational decisions. So we’re not subscribers to a perspective that says they’ve gone hog wild, they’ve gone crazy. We think that if you examine consumer behavior over the last 20 or 30 years, these decisions have been sensible in the context of when households and consumers took their action. For example, did they extend debt? Yes, indeed, they did. But the fact of the matter is, when you take a look at debt repayment capabilities and debt servicing, consumers were taking a perspective that said, Number 1, their wealth had increased, which it certainly had done through the 1990s and through this decade. If you take a look at successive recessions, the unemployment rate was going down. It went, you know, compared to the 1980s, the 1990s was a relatively, the 1990–91 recession was a relatively mild recession, and the 2002–2001 recession was yet milder still, with increasingly smaller peaks in the unemployment rate. So if you take a look at what’s going on, our perspective is, yes, indeed, going into the latter part of this decade, with the benefit of hindsight, it looks like consumers overborrowed and overextended. But in the context of when they made those decisions, collectively, it was a sensible thing to do. The perspective and the framework for those decisions changed because of the remarkable events, particularly the September events, that Fannie [Mae], Freddie [Mac], Lehman [Brothers], AIG array of September 2008 events when all of the sudden what we learned was the world wasn’t a stable place.
PORTER: And now let’s clarify again for our foreign viewers that Fannie and Freddie and Lehman, these are all major financial institutions linking to the housing market that came crashing and burning down around us in September, sent the stock market down after it and really sent a great deal of consumer panic going through. But, gentlemen, comparing your remarks here, it seems that there is a great deal of perspective that goes into this. And different interpretations.
MEIL: Sure.
PORTER: David used a phrase that we didn’t examine closely enough, and so let’s have your perspective on it, Jim: lost wealth. Has a whole generation of Americans lost a lot of wealth? Where did it go? Where did it go? Where is it? What’s your perspective on that?
MEIL: Well, wealth is a funny thing. Wealth is in the mind of the beholder, and in the valuations that are put on assets on the part of the market. In other words, my house might be worth $100,000, $200,000, $300,000, in a way it’s worth what I think, but it’s also worth whatever I can sell it for.
PORTER: At any moment in time.
MEIL: At any moment in time. So in 2006 or 2007, I could take my stock portfolio out or I could take my house out, and achieve a certain price X. Today, if I go into the marketplace and test it right now, it might be worth in a way what I think it is, but the real acid test is what I can sell it for, what the next person in line says it is worth. And, collectively, as David mentioned, $10 trillion, 20 percent of household net worth, has evaporated over the course of the last six quarters.
PORTER: If one were going to sell everything that one owned right now, one still has the option of hoping that a return might, might restore that lost wealth.
MEIL: Hope springs eternal.
PORTER: Indeed so. [Laughter]
MEIL: … and I will say that there is hope going from here forward that there might be something in the way of a return to normalcy. But I think that perhaps is the $64 question. What can we expect out of asset returns, over the course of the next few years? Are we going to get some kind of return to normalcy? Are we going to get some kind of spring back, a partial spring back? And that is one of the controversies, one of the debates within the profession right now. And, you know, it’s the Number 1 question for analysts. What is the nature of the comeback, the spring back, not only for assets, and asset valuation, but also for the U.S. economy and the global economy in general.
PORTER: And one clarification. The trillions that we have discussed, that we have … that categorized as lost wealth: Is that just in the United States, is that worldwide? How high does that figure go? If we look at it worldwide.
CROSS: That’s the U.S. figure. Worldwide, I don’t really have a strong feel for what that number would be. Jim?
MEIL: I do not have that number at my command. But my guess is that worldwide it would probably be a number that’s roughly comparable. Again, if you evaluate, let’s say, global household wealth concept, but I haven’t done the homework on that so that’s a guess.
PORTER: And following up, too: Is normalcy going to return? The whole question really is, is there a new normal that is coming?
CROSS: Definitely something different from what we have been experiencing. What we were experiencing in the last seven or eight years was a big casino. Everybody was making bets on their homes, on their portfolios, expecting that, at any point in time, they could turn their home into a big wealth-generating machine. It was a big cash-generating machine for a lot of homeowners who took a lot of equity out of their homes to finance their lifestyles. But for the most part, it was a very risky proposition, fueled by very low interest rates, by an awful lot of irresponsible lending. And irresponsible on the part or the lenders and irresponsible on the part of the borrowers who you might say didn’t know any better anyway. They didn’t read the fine print. But in point of fact, as we broadened this pool of ownership to what was referred here as the subprime market, people who normally wouldn’t qualify for certain kinds of home loans or any kind of home loans based on their income or their available assets, as we broaden that pool, it was all done on the basis of an assumption that home prices would go up forever.
PORTER: But that’s what’s passed. We’re looking to what will that new normal be like. Jim Meil?
MEIL: As much as I admire David’s work, I think he puts a little bit of a pejorative perspective on things, and his words are charged, and I might take a little bit of a different perspective. Maybe going from the sublime to the ridiculous, let’s try this metaphor: Let us suppose that we make our decisions as we do every day and then tomorrow we read on the front page of the New York Times that a meteorite is about to hit the earth and vaporize everything next week. Well, my best guess is that that means my stock portfolio is worth nothing and my house price is probably not worth a lot. I probably won’t be able to sell the house, et cetera, et cetera, et cetera. Why? Because we have a piece of information that a meteorite strike is going to destroy planet Earth. That’s a little bit ridiculous, but I think the story that it tells is that consumers make the rational decisions based on the information they have at the time and based upon the history and experience they have at the time. So what looks like, maybe, a big bet in the gambling casino from the perspective of the fall of 2009 was not that crazy in the context of those years, now passed, that look so sweet in retrospect.
But Charlene, getting to your point, which is great, about “taking different perspectives on the past, what does the future hold?” And I think, and I don’t want to speak for David, I think this is true for both of us, the world changed. And the world changed in a major way post the events of the fourth quarter and first quarter. And what it does mean for consumers is consumers are going to sit on their wallets. And whether you have David’s perspective or my perspective, rational households and rational consumers are going to be very, very much conservative, compared to the perspectives they brought into the marketplace, the way they spent money, how they managed their wealth. Having been through the trauma of the last year, it’s a different mindset, more conservative mindset, and it does raise some questions with regard to the vigor and energy that we’re going to get in this expansion.
CROSS: Well, it’s not that people are going to stop spending all together or that they’re going to drop their spending more than they already have. I think we have seen most of the declines in consumer spending already. What we are going to see though in the next couple of years, and really going out further, is a ratcheting down of consumer spending generally, growth and consumer spending in the United States. From historical rates that were in the three and a half to 4 percent range, maybe down to about 2 percent.
PORTER: That is 2 percent of disposable income that is going to …
CROSS: Just growth in spending year over year. That is fueled to a large degree by the fact, too, that the United States still has a very powerful and positive demographic portrait, compared to other developed countries, especially.
PORTER: What does that mean — demographic portrait?
CROSS: Well, the United States is the only developed country where we can expect population growth to be of any significant size over the next decade. We’re probably looking at growth in population — just that broad measure of people — of about .9 to 1 percent per year. If you compare that with Germany, where we expect population to decline over the next decade, and Japan, where population will decline even more, that positions the United States as the star in terms of the consumer marketplace. We also have in place in the U.S. two very powerful demographic events that are occurring. One is this very large generation of baby-boomers, some 80 million people, who are passing through some very critical life stages. In particular, the oldest part of the baby boom begins to reach retirement age, starting in 2011, traditional retirement age. A lot of people have pointed to that as evidence that the U.S. is doomed because retired people typically cut back on their spending significantly. They choose to worry a lot more about the future, and they just generally don’t spend as much. That’s based on as assumption, though, that baby boomers are just going to immediately retire when they reach the age of 65. We believe that that’s patently not going to happen. First of all, because they are living longer and they are much healthier than generations that preceded them. That means they’ve got all this extra time and extra health and they have to work in order to be able to make the money last as well. People who work spend money. It is not just a retired class that we’re talking about — it’s an older group of consumers who will be making a lot more than previous generations at that life stage. And the other big demographic event in the United States is the emergence of basically what are the children of the baby boom, what people call the echo boom, or generation Y. That’s an equally large generation, some 80 million consumers, who are beginning the stage of starting families, becoming independent, and starting their own spending patterns as well.
PORTER: Which is a great consuming time of life — having children, buying a house, all of those things.
CROSS: Exactly. For anything connected with it, from homes to cars. The automobile manufacturers, in particular, are quite thrilled with the prospect of all of these new drivers, and these new homeowners buying cars. It makes the United States very unique in the world because there is no other country in the developed world that’s quite like it.
PORTER: Let’s go ahead and …
MEIL: If I could just add one quick dimension.
PORTER: Please do, and we need to go to Beijing and get their perspective.
MEIL: Absolutely. Very, very quickly. I think one other dimension that makes the United States somewhat unique is the nature of the labor supply and demand situation, which is — and your panel actually illustrates it. I’m sort of the old-fashioned lifetime employee of an industrial firm. David’s sort of the new model, which is a consultant. I’m fixed cost. He’s variable cost. And what we represent are sort of two different poles, two different paradigms. I’m the old-fashioned guy, lifetime employment, with a company, 25, 30 years. But the future is going to be more along his line — the flexible work force, deployable, bring them on when you need them — and, you know, this is the risky part and volatile part — let them go when you don’t need them anymore and that really is going to be the paradigm or the model for the way the labor force is deployed in the United States. It’s scary, if you’re a supplier of labor, if you’re a household or a worker. But the good news, I think, is that it means that you’re very flexible and you can respond to the ups and downs of a volatile economy. It is a scary experience but it does make for productivity and efficiency.
PORTER: And certainly more unpredictability than what we’ve seen to a degree in the past. So there is where we’re beginning. And now we want to turn to our guests who are also with us at our embassy, participants in Beijing. Jonathan Turley is the public diplomacy officer who is hosting the group there. They have been listening in, standing by. Jonathan, do you want to tell us who is with you there, in Beijing, and see what kind of questions they have for our panel.
JONATHAN TURLEY: Charlene, thank you very much. It has been a very interesting discussion so far and I’m sure we have a number of questions here in the audience. We have journalists from mainly financial magazines, newspapers here in China. And so I will let them introduce themselves as they ask questions but we’ll turn it over to them, whoever has any questions here.
QUESTION: Thank you. This is Wong Zhou [phonetic] from [?] magazine. Just one quick question for David. Hi, David. You just mentioned that the McKinsey Report that 50 percent of the consumers are going to hold down their spending when the economy starts to recover. But do you think it’s a momentary phenomenon that will just last two or three years, or will it be a long-term trend? Thanks.
CROSS: Well, I don’t really believe any survey data that’s taken in the midst of a desperate recession, because people may feel that the world is ending, but they don’t necessarily believe it once their jobs start to come back. I think we’ll see a very difficult two to three years. It’s going to be a very volatile kind of recovery, a very weak recovery by historic standards instead of the typical kind of 7 [percent], 6 percent growth that we might expect to see and we’ve seen in previous deep recessions. We’re probably looking at average growth of 2 [percent] to 3 percent over the next couple of years.
After that time, I think then we see — as jobs and incomes begin to recover, and substantially, and also because of the demographic forces at work — I think you can see a little bit stronger growth in spending. So that, that momentary kind of thing of saying, you know, “I’m not going to spend any money, not ever, or certainly not for the next couple of years,” goes away. And 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.
PORTER: Jonathan, next question.
TURLEY: I think that’s all the questions we have from Beijing. I don’t know if Guangzhou has any questions.
PORTER: All right, I think we have …
TURLEY: Back to you in Washington.
PORTER: Thank you very much. We have quite a group with us also in Wellington. Economic officer Mike Layne, are you standing by to tell us who is there with you and see what questions you have?
MICHAEL LAYNE: Thank you very much. We have a wide-ranging group representing the New Zealand government, we have the academic community here, we have the private sector. So I think they have a few questions in store, so I’ll turn it over to them and let them introduce themselves so that they can ask their questions.
QUESTION: I’m happy to start out. I’m Suzanne Snively [?]. I’m an economist in economic development with PricewaterhouseCoopers here in Wellington. I am just am wondering — I think this is more for you, James — what about the future of manufactured products? I’m speaking about the pattern of consumer spending. When consumers do start to spend again — is the pattern going to change? Will we see them investing, for example, less in motorcars and more in some other lifestyle things? From New Zealand’s point of view, we’re particularly keen that people continue to want to buy our high-value meat products and dairy products. Will we see a pickup in consumer spending for that high-quality-lifestyle type eating or will people look for cheaper commodity-based eating, and so on?
MEIL: Well, I think David hit upon a few of the themes. And I think I might be in a position to reinforce them. Any time you go through an economic trial, an economic difficult time as the world is experiencing right now, you do get, you know, a movement downscale. You do get in the automotive industry decontenting. Another phenomenon that we see in the U.S. with an afflicted housing market, which is not only lower volumes but in essence a migration down the food chain, if you’ll pardon the pun, on housing, a less content, smaller square footage. And this is sort of part and parcel of any kind of recession. However, one of what we believe is an opportunity on the global stage is the fact that, you know, the United States and the rest of the industrialized world is going through its trial right now, but if you start taking a five- or 10-year perspective, there will be a recovery, there will be a rebound, and much of that recovery will be driven by the high-growth, high-potential countries, sometimes referred to as the BRICs — in terms of four of the major players, Brazil, Russia, India and China. And I guess two things to make mention of: Number 1, they’re at a stage of development where there is a higher propensity to spend upon material goods, durables, nondurables that have high material content. Once you start moving and shifting to higher-income societies, there tends to be more of a services orientation to the marginal dollars spent by consumers. That’s why in the high-income OECD [Organization for Economic Co-operation and Development] countries you tend to have more dollars devoted to either high-end material products that, let’s say, might not be, let’s say, heavy in steel content, but, let’s say, more of a services bent. However, from a New Zealand perspective, I would say, as you take a look at global diets, tied to income, less so perhaps a U.S., less so, perhaps, a Europe, but in India, China, Brazil, they are going to migrate up: car in the garage, richer diet, probably heavy in terms of ... heavier in terms of high protein, high meat.
PORTER: So it’s those New Zealand lamb chops is what the lady is asking about. [Laughter]
MEIL: There is a future there.
PORTER: There is a future in lamb chops. [More laughter]
MEIL: When I return to my home, I anticipate putting some of those lamb chops right on the table.
CROSS: Don’t count out the affluent consumer in the United States either. They have taken a hard hit in this recession and that’s very unusual. Usually, affluent households here are relatively immune to recession and they’ve been particularly battered this time around. But we do have that very large group of younger baby boomers, who are still passing through peak earning years, and who will form the core of the affluent market and it is still a very large and will continue to grow, very large group that will continue to grow. So that remains a powerful market for those high-value-added products.
PORTER: Another question, Mike, from your group.
QUESTION: My name is Rob Talbott [?]. I’m a former legislator, a member of Parliament in New Zealand, involved with the New Zealand and American activities. Now, just to lead on from your question —- you almost touched on it in your last question, I think, and in your general conversation this morning, you talked about how the world has changed since the last great recession [inaudible] over the last period of years. My question is, we’ve seen this huge growth in China, the Chinese economy, over the last decade in particular. Do you think that will have any influence at all on the speed of recovery of the U.S. economy? Because it seems to us from where I’m sitting here that China is having more of a global influence now than it’s ever had before, and that will grow with the increasing consumer production and so forth that we all know about. Do you think that will have any influence at all on the speed of the recovery in the U.S.?
CROSS: Well, I think that’s more of a longer-term prospect than a short-term prospect. The Chinese economy, as you know, is pretty lopsided. Consumer spending in China is, as a percentage of GDP [gross domestic product], about half of the rate of the United States. Those are very large differences, and saving rate among Chinese consumers is anywhere by some estimates from 30 to 50 percent compared to current rates in the United States of 4 to 5 percent. Until there is some additional safety net in China to encourage households to spend more, and until the distribution system is in better shape, and the product mix is better, is more available, I think the Chinese consumer is ill-equipped to carry the burden of the world economy. If anything, the Chinese economy is very dependent on recovery in American consumer spending. And without it, I think you’re going to see even more stimulus in the Chinese economy than what the government may otherwise want to do.
PORTER: Do we see … I think what Mr. Talbott is also referring to is there was the expectation that the middle classes — the consuming classes in China and in India — were going to be growing, they were so even though their rate of consumer spending perhaps is not as high as ours, just in sheer numbers of people, that there would be more consumer spending in that way. But has our pullback affected the growth of those middle classes in those large, very, very large, populous countries?
MEIL: I think, Charlene, and to members of our audience, I think we don’t have the data, enough data, at this point to know for sure. There are a few observations we can make, based upon what we do know. We do have some first-half [of the year] statistics data for China that do show that income growth, household income growth, in China actually outstripped the pace of growth of overall GDP. In the first half of the year GDP grew at 7.1 percent in China, per capita household income grew at 10 percent.
PORTER: While we’re having a recession, their household income is growing.
MEIL: While we’re having a recession, their household income is growing. Their retail sales [in China] grew at a real 16 percent rate of growth. So their consumers were out there spending. Now, what David says is true, which is, the proportion of spending in the economy is not what you see in a U.S. at order of magnitude — two-thirds in terms of the expenditures metric. It is not what you see in the developed world. But, if you take a look at the growth numbers, even through the trials of the first half of year recession, China held up fairly well. And if you take a look at prospects for future growth, just the process of urbanization in China is pretty impressive. I mean, you have order of magnitude, a migration pattern, where upwards of 200 to 250 million people over the next 20 years are going to migrate from rural areas to urban areas in China. I mean, that’s a number that starts to get to two-thirds to four-fifths of the population of the U.S. And they will become a larger and larger force in shaping the pattern of the global economy.
PORTER: More questions from Wellington?
TALBOTT: Thank you for that. [Inaudible] The Chinese will obviously need a lot of lamb chops in the future. [Laughter]
MEIL: Two hundred million people, I understand, can carve through a lot of lamb chops. You probably don’t need an economist to tell you that. [Laughter]
AUDIENCE: You need to help us pick it up, from 12 percent of the population — we’d like to just double it to 24 percent, please.
LAYNE: Some more questions from Wellington?
QUESTION: I’ll ask a question, if no one else will. My name is Mark Wenig. I’m the public fairs officer here in Wellington and I had a question about looking, taking a longer-term picture, longer-term view. The U.S. consumer has traditionally — certainly in recent times — driven the world economy in terms of being out in front. When this recession is over, is the U.S. consumer going to be as important to the world economy, or is the U.S. consumer going to have a diminished role in some way as a result of this recession?
PORTER: Crystal balls, gentlemen.
CROSS: Diminished, but not significantly. We still have a consumer economy that’s somewhere in the neighborhood of $10 trillion. That’s not disappearing. And it continues to grow once we get out of the recession. So it remains the most powerful force in the global economy in terms of its size. In terms of its growth, it’s not the most powerful force. But definitely remains a pivotal player in the world economy. There is no other consumer sector that’s capable of picking up the slack. And that’s one of the problems the world economy has now that the U.S. economy, the U.S. consumer has pulled back, it’s had this ripple effect through all manufacturing-based economies, and until the … until the U.S. economy gets back on its feet, through consumer spending, you really won’t see a quick rebound in the global economy, except among a few of the major exporters.
MEIL: I concur with that. And I guess if there was one nuance that I would add in terms of just change in perspective on what we’ve learned over the last 12 months is that the U.S. consumer is an important force, but the behavior of consumers around the world, and the behaviors of economies around the world are a lot more linked and a lot more simultaneous than we thought. There was a prevailing thought among analysts — let’s say up to the last summer — a thought called delinking, which was, one part of the world might go into a recession, but the other parts of the world were sufficiently independent that even if one part went into recession, the other parts of the world would network and basically be able to muddle their way through. And what we learned, particularly after September of last year, is that the powerful links that exist in trade, and the powerful links that exist between financial systems, form such a powerful network, that when things slide, there is no part of the world that can really escape it. It truly is a global economy, truly tightly bound, not delinked by, particularly, financial and trade linkages.
LAYNE: Any more questions from Wellington? ... If it’s possible, I’d like to ask one question myself, and that is you mentioned quite a bit about the consumers tapping on home equity. But also in the U.S., we had a substantial credit-card bubble. And how do you see that credit-card bubble kind of playing out and how … what’s the effect on consumers?
CROSS: Well, we’ve seen a decline in consumer credit demand for the first time ever over the last several quarters. A lot of that is due to people, to consumption patterns, the fact that retail sales are off by about 10 percent year over year plays a very important part in how much people are borrowing or paying for their purchases with credit cards. But another factor in that is the supply of credit that’s been made available to consumers. It’s been an extremely aggressive move on the part of credit card issuers to cut lines of credits, to cancel cards outright, to basically stop marketing new credit to existing consumers and potentially new consumers as well. So the role of credit, as I think I mentioned before, over the next couple of years, is one of the things that holds back the consumer recovery, particularly as long as the banks remain reluctant to lend and continue to impose higher fees on consumers. I think that pullback in consumer credit demand remains very much in place, at least over the next year.
PORTER: And we have a lot of activity in the U.S. Congress right now too about credit and certain restraints. Would you all care to comment on that? There has been a lot of criticism from lawmakers across the United States about how banks and lending companies have marketed to consumers. Is that going to change the long-range picture, do you think?
CROSS: I have a more cynical view of the future of that. As long as banks are allowed to do the kind of lending that they’ve been doing — and they will always find ways around the regulation. We still have not established any kind of specific new regulatory principles anyway, so we don’t know what the future regulatory environment will look like for banks and credit card companies. I think we, hopefully, have learned a lesson about supplying credit to people who were not capable of handling it. But that does require that we then pay a price by seeing consumer spending sag a little bit more as well.
PORTER: Jim Meil, you’re nodding over there.
MEIL: I agree with what David has to say. And perhaps I’m one of the few people in the U.S. who actually has a degree of sympathy for the banking industry. Perhaps because I don’t work in it [laughter], perhaps because I can look at it from a considerable distance. I don’t remember a lot from my money and banking course that I took when I was in graduate school but I seem to remember that banks lend money to people and institutions that will pay it back. And because of that, when we are dealing in a world with upwards of, you know, a recessionary peak of 10 percent unemployment compared to four and a half percent in the final stages of the expansion, when incomes are under duress, and I speak of incomes for households and individuals, profits for corporations, banks tend to be less aggressive with regard to extending those mailed-in credit offers, extending that credit, and banks have to be very careful because they are sitting on very thin capital bases. So, once again, we condemn banks for not stepping up to the plate and taking a role in helping the expansion by extending credit, yet at the same time we want them to be profitable, we want them to serve a number of different functions that makes me glad that I’m in the manufacturing business.
PORTER: Beijing, you passed us by with just a single question. Should we come back to you? Has anything else come to our guests in Beijing? ... Going once, going twice. All right. [Laughter] Gentlemen, I believe, David, that it was you who mentioned, we, certainly we have touched on China, we’ve touched on India. The expansion that we can see, say, a decade out in these countries and how they may contribute to steady growth in the world economy. Let’s bring in some of the other emerging countries. We have the G20 is meeting in Pittsburgh this week. We have countries, as you mentioned, say Brazil, for instance, another country that’s on the rise. Some hope for the Central European economies still emerging. How are they going to, perhaps, change the rules from what you both learned at the beginning of your careers?
CROSS: How do they change the rules?
PORTER: In terms of a recovering world economy.
CROSS: Well, the consumer markets in all of the developing countries are so small that they can’t really play a very important part in the immediate recovery but over the longer term as the middle class develops, you always have this explosion of growth in demand for all kinds of goods that people assume to be middle class goods. Everybody wants these hallmarks, these signs of progress. So, certainly, those markets remain very important to the future. But I’m a little bit negative about their ability to contribute significantly much before the middle part of this decade.
PORTER: The middle part of the next decade …
CROSS: Of this decade. Probably by …
PORTER: By 2009?
CROSS: The second half of this decade, I am sorry, the next decade, yes.
PORTER: Okay. [Laughter ] All right.
CROSS: As a forecaster, I’m always looking a little further ahead.
PORTER: So that’s into 2015 and beyond.
CROSS: In that time period we may see some significance in terms of that segment’s contribution to the world economy. But, in the immediate term, I don’t think it is all that powerful a force.
PORTER: Jim?
MEIL: Well, I would say in terms of the total spectrum of consumer goods and services purchases, what David said is true. I’ll say in isolated, and what to my company are fairly significant markets, we are starting to see a substantial emergence of production and purchasing power. And I think the automotive industry is a very good example. We sort of standardize on, when times are good, on a U.S. North American motor vehicle automotive industry. That’s about 16 million or so units. In other words, that’s sort of our benchmark for times that are reasonably prosperous. We’re certainly not experiencing those kinds of times in 2009 but you might think of that number in terms of what we see in the U.S., in terms of what you see in western Europe as a benchmark. And, just to, sort of, establish how rankings are occurring, in China, for example, we have a market that’s starting to get to be 10 million, two-thirds the size of what we see in North America or Western Europe. And in Brazil we’re starting to see numbers get to the stage of about three and a half million. Those are total motor vehicles, so those numbers would also include commercial trucks. But those are the kind of powers that we’re starting to see emerge as major regional markets in South America, in Asia, that do represent an advance and do represent size and scale that compared to, let’s say, 10 or 15 years ago. In a China, for example, in the late 1990s, your average year was about 1.5 million in terms of motor vehicle production and internal consumption. So these are starting to become major factors, major-scale players on the world stage.
PORTER: What is the time line where you look at that development, Jim? David mentioned 2015 as being a period where it may start being a significant factor. How do you look at it in 2020, 2025?
MEIL: Well, let’s take a look it, Charlene, in the year 2009. In the year 2009, granted hobbled by a recession, but the U.S. and North American markets this year are going to be comparable in size to China. So, in a way, while we do expect a recovery and a rebound, China’s pretty much there right now today as a premier motor vehicle market.
PORTER: But, again, let’s go farther out on to the horizon, just because we can.
MEIL: Let’s go farther out? Okay.
PORTER: Just because we can. [Laughter]
MEIL: Okay, sure. Let’s go out, perhaps, 10 or 15 years, and we probably are talking about China’s being the premier market. Order of magnitude, we’re probably talking about, by end of the next decade, reaching upwards of 20 to 25 million motor vehicles on a per-year basis in terms of production and domestic consumption.
PORTER: And the other is …
MEIL: That’s pretty big.
PORTER: I think that, well, many of us have grown accustomed to the idea of, you know, China being a real economic powerhouse worldwide. But I think less is known about the Brazils, the Argentinas, South Africa, for instance, if you could address those.
PORTER: Let’s see, the growth might not be quite as dramatic and might not realize the same kind of volumes, but again I’ll have to do a little bit of noodling here. We’re probably talking about order or magnitude of Brazilian market getting upwards of 5 to 6 million. [South] Korea, I think would be in a 10- to 15-year time period — not for domestic consumption, more so for production because much of the Korean market is for export — but in that five to six million range. So you are talking about significant motor vehicle markets, and production areas that serve not only the U.S. and Western Europe but the world as the world economy progresses, as incomes rise, cars, automotive transport, motor vehicle transport is a … personal transport is desired. It is a superior good.
PORTER: When we’re talking about auto transport, what we are talking about again is, recapping, it is the middle class consumer who is — you make that step into the middle class, that’s what you want. That’s one of the goods. It’s a car, it’s a washing machine, it is your own home. It’s those things. Yet, still in many countries of the world today, there is great income disparity in particular countries. We have a very small wealthy class, a huge poor class, very small middle class. When do you see a greater convergence, more and more countries are going to be joining those of us in the developed world where the middle class has the greatest economic power?
CROSS: Well, there is some question in the United States as to whether or not we have a middle class anymore.
PORTER: That’s true [laughter], and whether we have the most economic power.
CROSS: The United States remains, among the developed countries, has the most unequal distribution of income. But that aside, I think what you’ll see is a gradual narrowing of the differences, except for the United States, where, I think, those differences could easily widen as we move further out. And one of the reasons is demographics, in particular. As baby boomers do slow down, and their incomes fall, you do tend to see a movement out of the middle class, into lower-income groups. We also have, because of our unique immigrant demographics, our unique numbers, a large number, a large Hispanic population, large African-American population, large Asian population, who tend to be much lower-income as well. Those are the things that kind of make the United States rather unique, and in terms of making it more difficult to evaluate versus the rest of the world as a consumer marketplace.
PORTER: I was looking more toward other countries of the world. Jim, what do you think? The growth of the middle class: How long in many of the developing-world countries now, the emerging markets?
MEIL: I think the very question, Charlene, raises two or three interesting issues. Issue Number 1 is just, let’s say, technology transfer, the ability of, let’s say, the world to interconnect, and for barriers to break down, mean the convergence could potentially can take place faster than ever before. One of the examples that I would like to take a look at is manufacturing wages and a Korea, for example. I started looking at Korea 25 years ago, and it was considered to be a low-cost labor place to manufacture because prevailing wages in Korea at the time were 10 percent of what was paid in Japan, Western Europe and the United States. Those wages — total employee compensation in the manufacturing sector — have advanced over the course of 25 years to be 50 percent of the leading-edge frontier wage-setting countries — U.S., Canada, Western Europe, Australia, New Zealand and Japan. So … roughly half of the gap has been closed over the course of close to a generation time. I would expect in another 20 to 25 years, a Korea will have closed much if not all of the remaining gap. If you go back in time to the 50s and 60s, the Japan experience was somewhat similar. Now, not everybody might have the fairly smooth flight paths of a Japan and Korea. But I would say, over the course of 40 to 50 years, even a low-income economy, if it puts into place correct policies, growth policies, can converge to the frontiers of what you see in the high-income world. So if you want a short answer, that’s the long economist answer. If you want the short, succinct answer, figure 50 years.
PORTER: Right. We are coming into the final minutes of our hour. I want to ask both of our guests, any closing comments? Any points that we overlooked, skipped over, care to correct before we sign off to our posts?
CROSS: Well, I would just like to encourage people to, when they look at the popular press and their perceptions about consumer spending, they are very much distorted, I think, by the notion that behavior has changed, that consumers have entered this new era of being very frugal and that that will last forever. We need to put that into historical context, and that would tend to fly in the face of this more permanent kind off frugality that people talk about. And the second thing is that we often ignore too those very powerful demographic forces in the United States which are unique. Not just in the developed world but in developing countries as well which position the United States consumer in very good stead in the next decade.
PORTER: Jim, any final words?
MEIL: We know from the experience of the last 12 months the world can be a scary, volatile place, and can be quite a roller coaster ride. What we’re going to go through for the next year or two is an adjustment process. Higher savings, a lower consumer spending path, probably a slower recovery path, for the U.S. economy, and for the global economy. But once you get past that two or three years of adjustment, we’ll probably find, and I think this echoes a comment that David made, that we’ll return back to something close to normal. 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 OK. So, you know, it was quite a nightmare while we were going through it but we’ll wake up and we’ll be okay in a few years and we’ll look back and maybe we’ll even laugh.
PORTER: All right. [Laughter] So in closing then, all reports to the contrary, financial meltdown averted. Wellington, thank you so much for being with us. All of our guests there, thank you for your questions. Beijing, thank you for being with us and we appreciate the technical support from our colleagues there, and their staffs. You have been watching In Focus, from the studios of the Bureau of International Information Programs at the U.S. Department of State. Our guests today have been David Cross, president of Market Outlook. He’s come to us from San Diego, California, today where he runs a marketing-based research firm. And also, our second guest has been Jim Meil, who has come to us from Cleveland, Ohio, where he is employed by the Eaton Corporation. Thank you so much for being with us. I’m Charlene Porter. Hope to see you next time on In Focus.
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