Commerce Department statistics for January signaled an increase in consumer spending. Great news for the economy, right? Well, not so fast. Problem is, households appear to be raiding the piggy bank and reaching for the credit card again to cover the tab, and that doesn't bode well for the future.
Economists have waited breathlessly for the return of the consumer to energize the tepid recovery. That is because the United States depends heavily upon consumption spending, which constitutes nearly 71 percent of total economic activity. No other modern nation has anything like that level of dependence on
household expenditures; European spending, for instance, makes up only 57 percent of their output.
This disproportionate reliance comes at the expense of capital investment and to the detriment of future growth. Delaying gratification today (savings) provides resources for investment in factories, technology, research and human capital to generate higher levels of output down the road. Last year, the U.S. devoted just 13 percent of its gross domestic product (GDP) to capital investment. In other words, we are eating our seed corn.
Contrast that imbalance with our friends in China. Personal consumption spending averages 35 percent of GDP (half of our rate), while investment totals over 40 percent. Little wonder that their economy is expanding at four times the rate of the U.S. They are notoriously good savers, socking away 38 percent of their household income. Think of those savings as rocket fuel for their economic engine.
Not so in the U.S. The key to investment is saving, which provides the capital for expansion. But the savings rate steadily declined from 10 percent in the late 1970s to 2 percent before the financial crisis. Not exactly rocket fuel; more like corn ethanol. And while households have begun the process of paying down (or defaulting on) debt since 2008, the positive trend seems to be abating. The latest data show a drop in the savings rate to 2.4 percent of disposable income in January, and a 0.3 percent uptick ($31 billion) in debt last quarter.
Much like the concept of fiscal stimulus, the emphasis on consumption spending essentially encourages diminishing future rewards in order to enjoy more stuff today. We must create incentives to boost savings and investment and reduce our dependence upon household expenditures if we are to restore our competitive growth rate.
Perhaps the first and easiest step would be to get out of our own way. Our antiquated and anti-competitive tax structure discourages saving and investment in the U.S.and is badly in need of reform. And the current low interest rate policy of the Fed not only sets the stage for inflation in due course, but punishes savers at just the time in which they should be rewarded.
Ultimately, of course, it is up to each of us to adjust our mix of consumption and savings in our own self-interest, to assure sufficient resources to respond to life's exigencies and to provide for a comfortable retirement. But it's also good for the country.
Christopher A. Hopkins CFA, is a vice president at Barnett & Co.