Consumer Retrenchment In The U.S

Written by admin on April 15th, 2011

The United States has been the locomotive of the world’s economy. Specifically, in recent decades, the spending by the U.S. consumer has been the driving force behind most of the economic growth in the United States and worldwide. In this regard, the U.S. consumer spending has accounted for as much as 70 per cent of the nation’s .1 trillion economy and has been the single largest driver of the world demand for imports of goods and services. In fact, the U.S. imports have accounted for over 15 per cent of the total world import demand, much of which has been consumed by the U.S. households. However, despite the early signs of the economic rebound in many developed nations, trends in consumer spending in the United States suggest that the global economic recovery will be lacklustre at best.

The U.S. consumer spending in the coming years will remain subdued for several reasons:

1) Extended losses in household net worth, as deflationary pressures persist and housing and stock prices continue to decline. To date, the bursting of the housing bubble and equity-market losses have erased an equivalent of an annual GDP of the United States. In the past decades, rising household wealth, driven primarily by the growing home values, had a positive effect on consumer spending, and therefore on demand for imports. The collapse of the housing market and the prospect of continued declines in housing prices suggest that the negative effect of household wealth losses will persist, exerting the pressure on the U.S. consumer and therefore suppressing demand for imports of consumer goods and services.

2) Stagnant or declining household income due to rising unemployment. The U.S. unemployment rate has reached 9.4 per cent, with a prospect of a 10 per cent rate by the end of this year, despite the signs that the U.S. economy is coming out of the recession. Job losses, estimated to peak at over seven million by mid-2010, and declining household incomes will have a significant negative effect on consumer confidence and spending.

3) Slower credit growth than in earlier years. The rapid credit expansion in the United States, which boosted consumption, had been driven in recent decades by rising housing values. The collapse of the housing market and the consequent end to cash-out mortgage refinancing that earlier accompanied the periods of growing home values has ended the huge thrust to consumer spending from the rapid credit growth. Moreover, significantly tightened lending standards have suppressed credit expansion, stifling consumer spending.

4) Increased savings. The U.S. personal savings rate has already increased to over 5 per cent, the highest in fifteen-years. The upward trend in the savings rate is indicative of the U.S. consumers’ higher propensity to save because of mounting job losses, falling incomes, and increased financial insecurity. Altogether, these factors have contributed to slower rates of growth in consumer spending and have weakened demand for foreign consumer goods and services.

Therefore, the current trends in the U.S. consumer spending suggest that the expectations of a return to strong economic growth in the United States are unrealistic. The same holds true for most world economies, especially for those that are highly depended on demand from the United States. The retrenchment of the American consumer is therefore likely to keep the economic growth worldwide subdued for the next several years.

Ireland relies heavily on the U.S. economy, both from the perspective of direct investment, and as a marketplace for our goods and services. The longer spending power remains suppressed across the water, the longer the Irish economy will have to await recovery. Such is the nature of the global economy and Ireland’s deliberate and calculated openness. What we need going forward is a more resilient and coherent strategy such that we can stand on our own two feet and drive our own success more directly.

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