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July 7, 2013 5:51 pm
Remember Joe Sixpack? Having spent most of the postwar decades acting as the world’s consumer of last resort, America’s middle class was expected to play a more modest role after the 2008 crash. For a few years, US consumption went into hibernation. Now, with China’s growth slowing, Europe’s stalled and some of the early excitement fading from Japan’s “Abenomics”, prospects for global growth once again hinge on Joe’s appetite to spend. Is he feeling lucky?
The US middle class is hardly in an ideal condition to roar back as the engine of world growth. Median earnings have fallen by 5.4 per cent since the US recovery began. Unemployment remains closer to 8 per cent than 7 per cent. And households have at least temporarily stopped paying off their debt. Yet in the absence of other short-term sources of demand, hopes are once again pinned on the battered US consumer. Consumption accounts for roughly 70 per cent of US gross domestic product and about 16 per cent of global demand. Exporters everywhere are thus hoping the US consumer will do its bit for world prosperity.
Recent signs are that it is willing to help – but to what degree, and at what price, are open questions. In May, surging imports pushed the US trade deficit up by 12 per cent to $45bn, which was the largest jump in five years. Imports from China accounted for almost two-thirds of that. If it continues, the US-China deficit will exceed $300bn this year. Meanwhile, US exports fell. President Barack Obama’s goal of doubling exports in five years – always puzzling since it was a gross target – is beyond reach. Nor is business investment picking up. Last month the US added a healthy 195,000 jobs but it saw a continued decline in factory employment. Initial forecasts that the US recovery would be led by a manufacturing rebound now look badly misplaced.
Which leaves the US consumer. It all sounds very familiar. Before the 2007 bust in the subprime mortgage market, there was a long-running debate about global imbalances – the sustainability of world growth was threatened by a “savings glut”, in the words of Ben Bernanke, who took over as chairman of the Federal Reserve that year. China was saving too much, the US was consuming beyond its means and the trade deficit kept widening.
The 2008 financial meltdown convinced Mr Bernanke and others that the switch to higher Chinese consumption and higher US savings would be accelerated. The days when the US played the world’s importer of last resort were over. That was premature. Like Saint Augustine praying for virtue but not yet, everybody now has a stake in another short-term rise in US consumer indebtedness. The success of Mr Bernanke’s closing months in his job will depend a great deal on the continued growth of US household spending.
Which raises two questions. Can we rely on the US consumer to be the chief source of global demand growth for the next year or two while others restructure? And at what price? The answer to the first is probably yes. June’s jobs numbers further tilted expectations towards a tapering off of the Federal Reserve’s quantitative easing programme of $85bn per month. The UK, the eurozone and, most boldly, Japan, are adopting Mr Bernanke’s long-term promise of easy money just as he is starting to back away from it. Since the US recovery is the first to leave the station, it will hopefully tow others along.
But Mr Bernanke faces a delicate balance between signalling the beginning of the end of zero-bound interest rates without triggering an overcorrection. For the average middle-class household, there is a big difference between paying 3.5 per cent interest on a thirty-year mortgage, as it has for much of the last two years, and 4.5 per cent, where it is today. If the long Treasury yield leapt to 5.5 per cent the US housing recovery could stall. That would jeopardise consumer sentiment.
Even assuming that Mr Bernanke can navigate a gentle turn in the cycle, the US faces deeper questions about the resilience of its middle class. While asset prices are rising, and access to credit is easing, the US household is starting to catch up with some of the purchases it has postponed since 2007. But these come mostly from the credit card rather than the pay cheque. The US stock market has risen by more than 50 per cent since the crisis while median earnings have declined. As a result, the US household savings rate has almost halved to 3.2 per cent of GDP in the past 18 months – closely mirroring the recovery in consumer spending.
To be sure, the only thing worse than a US middle class which is releveraging is one that is not. Without Joe Sixpack, there would be no growth at all. Yet the most effective way to keep him spending is to convince him – and the creditors – that asset prices will keep rising, including the value of his home.
Only broad access to cheap credit can make up for the ever-narrowing concentration of US income gains. It is a road the US has been down before. To the relief of the Chinese, and others, the US middle class has emerged from the crisis still able to spend in spite of losing further ground. In the absence of a serious rescue plan from Washington, how much methadone will it take to keep it going?
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