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US: The Sleeping Giant Awaketh!

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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

Back in 2009, today’s title seemed far-fetched. Impossibly over-leveraged US consumers looked like they were down for the count, almost stone-dead. Their massive debt wall collided with plunging employment and an evaporation of the equity in their biggest single investment: the family home. Popular thought at the time held that it would take a decade or more to recover, and at that, growth would never again be quite what it was. Far from dead, this giant has had an extended snooze. Is it rousing?

First, let’s review this giant’s size. Per capita, American consumers are among the richest in the world, operating in the planet’s top domestic market. Consumers account for about 60 per cent of GDP in other OECD countries, but in America, their share is a massive 70 per cent. Given that the US kicks in about 19 per cent of global GDP, US consumers directly account for 13 cents of every dollar that circulates globally. Impressive indeed!

However, even a giant can overeat. As wealthy as it was, this giant’s illusion of never-ending growth and prosperity together with ultra-loose lending conditions tempted it to gorge on global and domestic delicacies for five long years. Indigestion turned the feasting into fasting; hibernation was long overdue, and it was bound to be a long one. It seems to have done its work, though. The consumer debt ratio, which peaked at 163 per cent in 2008, is now well south of 140 per cent, and declining. What is more, the savings rate is now double the pre-crisis level, meaning that without any further adjustment to consumer behaviour, the debt ratio will continue falling. Translation? US consumers can now increase their rate of spending, but in contrast with recent years, it’s now sustainable.

At the same time, they are seeing an improvement in their net wealth position. House prices, which plunged 27 per cent from the mid-2006 peak until the early-2012 trough are now up 24 per cent from their low point, and in the past four months have risen at an annual pace of 12 per cent. With the market now short-supplied, further price increases are expected in the near term.

These developments are impressive, but are they actually converting into activity? Thankfully, the answer is yes. Since its nasty swoon in early 2013, disposable income growth has accelerated to 4.2 per cent year-on-year, with strong monthly gains posted since January. Adjusted for inflation, growth is at 2.5 per cent and rising. Consumers have the money, but are they spending it? They are, but not as quickly. It seems that there’s a new prudence, perhaps conditioned by the long employment drought, especially among younger workers.

But that’s also changing. Job gains over the past 6 months are equal to the post-stimulus high point, and rival pre-crisis peaks. UI claimants and hiring intentions data suggest that there is more to come, despite the August setback. As these employment gains boost total wages and salaries in the economy, we can expect further acceleration in disposable income, which will continue to spur spending forward. Pent-up demand in the economy suggests stronger near-term growth than we have seen to date, and given the age-distribution of spending, will likely be aided further by a slight lowering of the savings rate.

If pent-up spending pressure means that Americans actually have to get out there and spend, there’s a very significant recent development that suggests that for the first time in the post-crisis period, they now want to. Americans are the world’s ‘glass-half-full’ people, with a relatively high risk appetite that is rooted in their early history and is the envy of the rest of the world. But they were rocked to the core by the crisis. Consumer confidence plummeted in 2009 to levels vastly lower than the lowest lows of modern times – depressionary levels – and recovered, but only to recessionary levels, where it remained – uncharacteristically – for over five years. Three times confidence attempted to recover, and failed. But just over a year ago, it burst out of the recessionary zone, and continues a steady march. They’re back!

The bottom line? The world has missed its friendly giant over the past five years, but it’s not dead; it has just been sleeping. Fortunately for us all, it’s not just in a post-hibernation stupor; it has had a good dose of coffee, is hungry, and ready to go. Canadian exporters, get ready to take advantage.


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