The president of the Federal Reserve Bank of Chicago is travelling the world with a stark warning for the global economy – the U.S. consumer is no longer the dominant force he once was.
During a recent visit to The Globe and Mail, Charles Evans commented that his main message when meeting with global counterparts is that "the U.S. consumer is not the U.S. consumer of 10 or 15 years ago."
This decline should loom large in any forecast of global economic growth, but its impact is still not fully appreciated by most investors and executives. Spending by consumers drives about 70 per cent of the U.S. economy and about 15 per cent of the world's gross domestic product.
Yet, as Mr. Evans suggests, the willingness of the American shopper to continue to provide seemingly insatiable demand for the world's goods is very much in question.
Stagnant pay, high unemployment and a deflating credit bubble are making Americans think twice about heading to the mall. The chart to the left shows that inflation-adjusted disposable income growth for U.S. workers has been in decline since 1998.
Before the financial crisis, Americans could compensate for their shrinking spending power by taking on more credit card debt and home equity loans. But in the wake of the crash, debt has been declining.
Total credit card debt is still sliding from the peak of $1.02-trillion (U.S.) in October, 2008, while home equity loans continue to drift lower. With these two prominent sources of credit growth removed, Americans will only be able to increase their consumption if their wages grow and employment expands. Unfortunately, neither trend has materialized.
Throw demographics into the mix – aging boomers moving from their peak spending to twilight years –and it's clear why Mr. Evans, a voting member of the Federal Open Market Committee, which sets U.S. monetary policy, is concerned about the U.S. consumer.
The average American, having just exited a terrifying period of credit gorging, is unlikely to strap on debt to increase spending. And as long as technology and offshoring continue to limit wage growth, it is difficult to forecast a revival of the previously dominant American consumer.
Scott Barlow