If Americans won't spend, who will?

By Jim Jubak

Who will pick up the slack from U.S. consumers?

Somebody will have to if any global economic recovery is to be more than a blip based on temporary government stimuli.

U.S. consumers aren't about to become skinflints, but the scare of this deep and hard recession has increased the U.S. savings rate. And with the financial crisis leading banks and credit card companies to cut back lending and tighten credit standards, U.S. consumers simply won't be able say "Charge it!" at the same rate as before 2007.

Nobody could have been clearer than President Barack Obama at the recent Group of 20 global economic conference in London. Obama warned the world not to expect a return of the "voracious" U.S. consumer. He said the U.S. can't be expected to power the world economy by itself. If there is going to be renewed growth, it can't just be the United States as the engine.

No volunteers

The response was deafening silence. Two leaders of the European Union, French President Nicolas Sarkozy and German Chancellor Angela Merkel, rejected spending more money to stimulate their own economies. Reform the world's financial regulations first, they said. China's president, Hu Jintao, agreed to pony up billons more for the International Monetary Fund in exchange for a promise to give China more say in that body, but China didn't announce any new steps to jump-start its economy or to encourage domestic consumption.

And the problem goes deeper than a lack of political will. The U.S. economy is so much bigger than the economies of Japan and China, currently the No. 2 and No. 3 economies in the world, respectively, that it would take a huge increase in consumer spending in the rest of the world to make up for a relatively small drop in spending by U.S. consumers. In addition, in most of these economies, consumer spending is a much smaller part of the total economy than in the United States, again making it hard for China, for example, to pick up the slack.

The scope of the problem

What if the U.S. consumer couldn't pass the spending torch? It wouldn't be a disaster for the global economy. The global slowdown can still end, and global growth can still resume, even if U.S. consumers spend less and consumers elsewhere don't increase spending to make up the difference. But the cost would be a more anemic global recovery, with slower growth around the world. Slow growth would make it harder for the world to tackle hugely expensive challenges, such as how to pay for a rapidly aging global population.

The easiest way to capture the dimensions of the problem is to look at the U.S. savings rate in the years before the global financial crisis and what has happened since. The U.S. savings rate turned negative in 2005 and 2006 for the first time since the Great Depression years of 1932 and 1933. What does that mean? By definition, the U.S. savings rate is what is left after all consumption. At a 2% savings rate, for example, the U.S. consumes 98% of what its economy produces in a year and saves the rest. At 0%, the U.S. consumes everything it produces. And at negative 1%, the rate for 2006 as a whole, the country consumes all it produces and more.

Saving more, but below long-term average

Since the start of the recession, Americans have begun to save more. In January, the savings rate climbed to 4.4%. In February, it dipped slightly to 4.2%. Both were well above the negative 1% rate for 2006 and the negative 0.5% rate for 2005.

Both, however, were well below the long-term average for the U.S. economy. From 1980 through 1994, for example, the savings rate averaged 8%. There's clearly room for a further increase in savings.

(Any additional drop in consumer spending wouldn't be completely voluntary, of course. As banks and credit card companies cut credit limits and tighten lending requirements, consumers are less able to live beyond their means. The drop in home prices also has reduced the amount of money that consumers access through home equity lines or refinanced mortgages.)

A swing from a negative 1% to a positive 4% savings rate amounts to a huge amount of money when you're talking about an economy as big as that of the United States -- and one in which consumer spending accounts for about 70% of gross domestic product. In a $14.2 trillion U.S. economy, a 5-percentage-point increase in the savings rate -- and therefore a 5-point decline in consumption -- amounts to $500 billion. (Just to keep this in perspective, in recent years, the U.S. trade deficit has been around $700 billion a year.)

Continued: Half a trillion dollars

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