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In any other economy in the
world, such indicators would have been associated with real economy
recession. But in the US, this has been an integral part of the prolonged
boom which has been strongly associated with private sector spending
well in excess of its income, and more than counteracting the effects
of the newly emerged budget surplus. Growth was clearly being led
by consumption, not by export surpluses or government spending, and
any waning of consumption growth would imply recession in the absence
of alternative stimuli.
As Chart 4 shows, during recent
quarters, the annualized growth of consumption expenditure has remained
at around the 5 per cent level and durable expenditure growth has
been remarkably buoyant. Not only has the growth of such expenditures
slowed in the second and third quarters of 2000, but evidence of trends
in consumption expenditure in recent months (Chart 5) point to a substantial
deceleration in overall personal consumption expenditure growth and
a collapse in durable consumption expenditures. Thus, even if the
downturn in the US is recent, it stems from factors that appear to
stifle the principal stimulus to growth in the miracle years of the
late 1990s.
Chart 4 >>
Chart 5 >>
However, the view that this
occurs because the increase in energy prices have sapped purchasing
power cannot wash, because the consumption fest in the US has hardly
been determined by real incomes. What has been more crucial is the
willingness of the average American to dip into potential savings
to finance consumption, resulting in a gradual decline in the household
savings rates in the US to negative levels.
Credit, equal to net dissaving,
has been the trigger for the consumption boom that has driven growth.
If the more recent figures on consumption expenditures point to a
waning of consumer confidence, the explanation must be found in the
growing unwillingness of the average American to borrow her way to
a good life today at the expense of greater security tomorrow.
Till recently, this peculiar
consumerism of the American was attributed to the wealth gains which
American households had registered because of the boom in US stock
markets. It is widely known that the US is unique in terms of the
width and depth of the equity culture in the country.
According to recent Surveys
of Consumer Finances, a household survey conducted under the auspices
of the Federal Reserve Board, the number of share owners in the US
increased by approximately 32 million since 1989 and 1998 and 15 million
since 1995 to touch 84 million in 1998. While stock ownership through
self-directed retirement accounts and through equity mutual funds
were the two largest contributors to the growth in share ownership,
between 1995 and 1998 even direct share ownership increased. By 1998,
the probability that an individual between the age of 35 and 64 owned
some shares stood at above 50 per cent, with the figure standing at
62.4 per cent in the 35 to 44 age group.
During the years of the stock
market boom, which began at the end of 1994 and lasted till the end
of 1990s (with one major glitch at the time of the financial crises
of 1997-98), this wide prevalence of stock ownership resulted in a
substantial increase in the wealth of American citizens. The consequent
“wealth-effect”, which encouraged individuals to spend because
they saw their “accumulated” wealth as being adequate to
finance their retirement plans, was seen as a major factor underlying
the consumer boom and the fall in household savings to zero or negative
levels.
Similarly, the reverse process
is also seen to be operative at the moment. Thus, the recent slowdown
in consumption growth is seen as the result of a downturn in stock
markets that has made the consumer increasingly reticent in parting
with his income for consumption rather than investing it in assets
for the future.
Chart 6 >>
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