The American consumer is but a shadow of its former almighty self. Personal consumption in the United States expanded at only a 1.5% annual rate in real (inflation-adjusted) terms in the second quarter of 2012. Unfortunately, it continues a pattern of weakness that has been evident since early 2008.
Never before has the American consumer been this weak for this long.
The cause is no secret. Consumers made huge bets on two bubbles – housing and credit. Reckless monetary and regulatory policies turned the humble abode into an ATM, allowing families to extract dollars from bubbles and live beyond their means.
Both bubbles have long since burst, and US households are now dealing with post-bubble financial devastation – namely, underwater assets, record-high debt, and profound shortages of savings. At the same time, sharply elevated unemployment and subpar income growth have combined to tighten the noose on over-extended consumers.
The 30% mainly consists of four components – capital spending by firms, net exports (exports less imports), residential construction, and government purchases.
Given the strong likelihood that consumers will remain weak for years to come, America’s growth agenda needs to focus on getting more out of the other 30%.
The erosion is traceable to several factors, including deficiencies in primary and secondary education as well as poor macroeconomic management. But the US also has disturbingly low rankings in the quality of its infrastructure (#24), technology availability and absorption (#18), and the sophistication and breadth of its supply-chain production processes (#14).
Improvement on all counts is vital for America’s competitive revival.