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Taking Stock

Why America's 'zombie consumers' won't be coming back to life soon Add to ...

Economy watchers looking for a spark of life in the exhausted, debt-ridden American consumer are quick to latch on to any signs of a pulse.

The latest came in the form of higher personal borrowing in March. The $6.02-billion (U.S.) increase marked the sixth consecutive monthly advance and was nearly three times higher than the most bearish forecasts. And the best news of all: Credit-card debt climbed, marking only the second such rise since the housing and credit market collapse.

Getting American consumers back to their free-spending ways is the fervent hope of just about every economy planner on the planet. The old shopping habits of these once thoroughly dependable mall people formed the very foundation on which broad Western prosperity and strong growth in China and the rest of the emerging world were built.

But so far, the recovering shopaholics continue a distressing pattern of retrenchment, a trend undoubtedly intensified by plunging housing values and higher fuel and food costs.

U.S. consumer spending rose only 2.7 per cent in the first quarter, down sharply from 4 per cent in the last three months of 2010. Which is no trivial matter, considering that the consumer accounts for about 70 per cent of the U.S. economy, down from 71.3 per cent at the precrisis peak. (The Canadian level reached 64 per cent last year, up from 56 per cent in 2000).

The U.S. consumer share will continue shrinking until it returns to about the 66-per-cent level that prevailed for much of the last quarter of the 20th century, putting a big dent in GDP, prominent Wall Street economist Stephen Roach was saying the other day. "We're only 20 per cent of the way there."

Annual growth in real U.S. consumption totalled close to 4 per cent before the financial crisis struck in 2007. If the current trend continues, it will be closer to half that amount, Mr. Roach said in Toronto before addressing a business audience gathered at Grano restaurant for its popular salon speakers series.

"It's not a pretty picture," added Mr. Roach, a Yale University fellow who made his considerable reputation as a long-time, often bearish, chief economist with Wall Street heavyweight Morgan Stanley, before turning his attention to China and other rising Asian economies.

Before the crisis, American consumption was soaring not because of income growth or rising employment but because "we levered an asset bubble. We extracted money from overvalued property. And that's over. … Consumers are stuck with a legacy of excessive debt, inadequate saving, and facing high unemployment, higher underemployment, weak incomes and holding on to assets that are under water."

No wonder he declares that "the American consumer is toast." Higher exports and increased capital spending could help the U.S. economy weather the consumer's demoralizing decline. "But I would say reduce your estimates of trend GDP growth in the U.S. over the next three to five years by at least one percentage point. That's a big deal."

Indeed it is. And it's a shift that hasn't been lost on China, which has embarked on an ambitious plan to change its economic model from one focused on export manufacturing geared toward those U.S. shoppers to one centred on services and domestic Chinese consumption.

"A post-crisis generation of 'zombie consumers' in the U.S. is likely to hobble growth in global consumption for years to come. And that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers," Mr. Roach wrote recently in an Asian publication.

"I think China gets it, in terms of dealing with its imbalances," says Mr. Roach, non-executive chairman of Morgan Stanley Asia and author in 2009 of The Next Asia. "China will draw down surplus savings, its current account surplus and slow its rate of foreign-currency reserve accumulation and naturally reduce its demand for dollar-based assets."

But on the other side of the ledger, the United States will remain stuck with the world's largest current account deficit and a worsening fiscal and economic outlook.

"The debate in Washington tells me that we don't get it. We don't feel the pressure, the urgency to address our savings shortfall. The budget debate would be comical if it didn't have such tragic implications for the future of the United States."

The outcome could be "an asymmetrical rebalancing of the global economy, where the biggest surplus saver [China]moves in a credible way to boost internal private consumption, but the biggest deficit saver does very little."

I ask whether this increases the chances of the world sliding back into recession. "I'm not prepared to turn in my stripes as a card-carrying double-dipper," Mr. Roach says. "The lessons of centuries and centuries of financial history … make it very clear that post-crisis recoveries are weak. When they're weak for a long period of time, they lack the cushion that economies normally need to withstand the blows of a shock. So I don't think you can rule it out."

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