The technical term is “personal consumption expenditures”, but we know it better as “consumer spending” – the stuff that we buy from infrequent, large-ticket items, like cars and refrigerators, to weekly staples from the grocery store and gas station, to those capricious discretionary indulgences like diamond bracelets or seats on the fifty-yard line (take your pick) that lift one’s spirits from the travails of daily life. PCE – personal consumption expenditures – accounts for about 70% of US Gross Domestic Product (GDP). That is quite a bit more than the typical European country (in France, consumer spending is about 55% of GDP) and about twice as much as China, where consumers contribute around 35% to a GDP still largely dominated by government spending, private business investment and a large positive balance of exports over imports. The stalwart US consumer, driving the rate of growth for what is still the world’s largest single economy, has played an outsized role in the evolution of global markets since the rapid ascendance of a wealthy US middle class after World War II. It is with some trepidation, therefore, that the world looks on as the American shopper shows signs of waning ability to keep on spending.

Source: Wall Street Journal Online

The chart to the left shows the pace of US consumer spending since late 2008, in the aftermath of the financial crisis of that year. The data for this chart comes from monthly statistics released by the US Commerce Department. As the chart makes clear, the rate of consumer activity since that time has hovered around 0%. The sharp increase at the beginning of 2009 is a rebound off the trough to which spending fell in the wake of the crisis. The failure of consumer spending to sustain growth above 1% is a major reason for the anemic rate of overall GDP growth since that time.

Of course, the importance of US consumer activity does not stop at our shores. Much of what we toss into our shopping carts at Wal Mart, or the white goods (washing machines, refrigerators and the like) that we haul into our homes, come from manufacturing facilities outside the US. In particular, the world’s fastest-growing economies, like China, have gotten to where they are through the ability to produce and export increasingly value-added goods to what, for a while, seemed to be the bottomless appetite of US consumers. In China, economic policymakers regard 10% as a necessary minimum growth rate in order to build up the country’s domestic infrastructure and nurture the continued growth of a middle class without falling victim to major social unrest. Recently, China’s growth rate dipped down to high single digits – a level that any developed nation in Europe or North America could only dream about, but which has set off warning bells in Beijing.

The culprits of slower US consumer spending are not hard to identify. The combined rate of unemployment and underemployment is around 17%, household income has been stagnating for a number of years, and home values, the principal traditional source of household wealth, have been in decline since the end of the housing bubble. Households are still dealing with a massive debt overhang – a result of the fact that for many years, and in particular during the 2000s, increased consumption relied on the creation of massive amounts of new consumer credit. These are not trends that will reverse themselves quickly, and there is a reasonably good likelihood that consumer activity will stay muted for quite some time to come.

If so, then what are the prospects for the global economy? There is a great deal of potential energy in the form of a burgeoning middle class in emerging economies in Asia, Latin America and Eastern Europe. However, per capita wealth levels in these countries are still nothing like those of developed nations. Moreover, the prospect of over 1 billion people tumbling into the consumer-frenetic lifestyle of Americans raises its own concerns about availability of resources and environmental impact. There is no ready answer – markets have a way of finding the path to growth in the long run, but that trajectory can be bumpy along the way.

Tell Us:
Do you think the US consumer will ever return to the former glory days?

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