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Who needs consumers?

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by Peter Switzer

Wall Street did not like the latest reading on US consumer confidence, which dived in February to its lowest level in 10 months! But the big question for investors is, does a US recovery need consumers?

The Conference Board, which checks the pulse of consumers, found that confidence fell from 56.5 in January to 46 in February. Consumers have not been as glum as this since April of last year.

Current business conditions as well as the high unemployment rate have spooked consumers.

Of course, you can’t get too excited or negative over one month’s figures but the intriguing question remains — does America need the consumer?

All in the timing

My gut feeling and my training as an economist tells me consumers are critical to any recovery but it could be a question of timing. That is, you can have an investment-led recovery that kicks off the economy and that then brings in the consumer, who reinforces the recovery started by investment.

So, are the Yanks hoping that business and investment will ride to the rescue?

At the moment, consumers are not only negative about earning income in a high unemployment environment but many are repairing their personal balance sheets by saving more. And to make matters worse, the recession KO’d about seven trillion dollar’s worth of household wealth in the States.

To understand how important the US consumer is, around two-thirds of the country’s GDP comes from the big spending American shopper.

Export scenario

Chris Isidore, writing for CNNMoney.com pointed out that economists surveyed by the Blue Chip Economic Indicators tip growth of about two per cent a year in disposable incomes and consumer spending this year and next. But they still expect overall economic growth of about three per cent each of those years — and those estimates have been rising.

"The consumers don't necessarily have to be in the lead," Brian Bethune, chief US financial economist for IHS Global Insight told Isidore. "I would say that a balanced recovery is more desirable."

He says business investment and exports will offset the negatives from a confidence-crushed consumer.

That’s why I am happy to see the Nasdaq lead the way when Wall Street is positive as it reflects US companies exposed to business investors who buy technology and many of those are non-US buyers, which means export customers.

This scenario relies heavily on the great growers of Asia — China and India in particular — and this comes as the Reserve Bank deputy governor, Ric Battellino, has just given a speech talking up Australia’s prospects based on the great growth outlook for China and India.

CNN showed:

The US exported $1.4 trillion worth of goods and services outside the U.S. in the first 11 months of the 2009.
In 2008, the US was the Number Three exporter worldwide, behind only Germany and China.
US exports are growing fast at an 18 per cent annual growth rate in the third quarter.

"Exports are now 25 per cent to 30 per cent of US manufacturing shipments, a record high. They are growing twice as fast as the global average," said Joseph Carson, chief economist at AllianceBernstein on CNN. "So exports can be a big driver."

Investment-led growth

For me, if unemployment falls in the US it’s a bonus, but I am sweating on indicators that say factories are investing and economic growth is rising.

The National Association of Business Economists in the US pushed up the annual economic growth forecast for the year to 3.1 per cent and they said the economic recovery was firmly on track.

Also the Chicago Fed National Activity Index has turned positive after being negative for most of the last two and a half years.

This has to be investment-led growth and it makes me more comfortable that the Yanks can get their growth act together even if the consumer turns up late.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, February 24, 2010