There’s one nasty fact about the US economy that has been obscured by the very public argument about America’s debt ceiling, the threat of a default and the tooing and froing ahead of next year’s election.
And that is the consumption side of the economy is stalling and could end up dragging the economy closer to negative growth in the quarter that ended yesterday.
In short things could get worse, before they get better.
It’s something that President Barack Obama at least seems to have recognised with his call this week for new job-creation measures, such as loans to encourage construction spending, payroll tax holidays and other measures.
He’s taking aim at the worrying 9.1% unemployment rate, 49 million people on food welfare and millions of people who have stopped looking for work.
But Republicans aren’t listening and like much of the rest of the country, including business, have become blind to the damage the high oil prices, still high jobless numbers and weak consumer confidence is doing to consumer spending.
Figures out this week for personal income, spending and saving for May showed one major theme: American consumers have withdrawn into their shells completely and have stopped spending on all but essential goods.
That was supported by the US Conference board’s June consumer sentiment survey, which fell to an 8 month low, an outcome that took the market by surprise.
Investors chose to focus on a surprise rise in house prices in April from March, according to the respected Case Schiller House Price Index, but that was put down to the usual surge in demand for houses at the start of the Spring selling season in the US.
The spending and savings data were far more important (is that why they were overlooked?).
Although incomes rose in May, inflation-adjusted spending fell. Savings rose to 5% from 4.9% (Australia’s is double that rate).
US economists said these figures are typical of an economy in recession, not in recovery.
In fact they tell us there’s no confidence among consumers that things are going to get better (supported by the Conference Board survey).
Personal income rose at the rate of 0.3%, disposable income increased at the rate of 0.2%, and that left spending basically flat.
But after adjusting for inflation, income and disposable income grew by just 0.1% and spending fell for a second consecutive month, down by 0.1%.
The slowdown has been happening since February when oil and petrol prices surged strongly, and then kept on rising through April.
And real spending hasn’t declined for two months straight since March and April 2009, when the US was slowly pulling out of the recession.
The good news is that oil and petrol prices have fallen and the move by several countries and the International Energy Agency to intervene in the oil market with the aim of driving prices lower and hitting speculators, has worked for the time being.
And food prices, which rose strongly in the first five months of the year, may be on the way down as futures prices for grains plunge (corn is down 25% in three weeks) on the back of signs of record plantings by US farmers.
If that’s sustained that will take a lot of pressure of consumers and lift their confidence over the rest of this year.
Confident consumers are vital to America in the current context: consumer spending contributed 1.3% of US first quarter GDP growth of 1.9% (both annual) inflation adjusted.
Another weak month in June (or a repeat of May) will mean the economy got no push from consumers in the June quarter.
Government spending is falling as stimulus money dries up, business investment is rising more slowly than thought and the US trade deficit is detracting from growth, which was also helped in the first quarter by a bigger than forecast rise in unsold stocks.
That’s another trait of a slowing economy.
A year ago the Federal Reserve, frightened by the prospect of deflation, started a second round of easing, which ended overnight Thursday.
A year on, at least there’s now no sign of deflation, and the IMF and a lot of other analysts see a rebound in the second half, according to their latest forecasts.
The Fund sees US growth averaging 2.5% in 2011 and 2.75% in 2012.
For the 2011 forecast to be met, the economy will have to rise from the first quarter growth outcome of 1.9% annual.
But if there’s a slowdown towards 1% in the June quarter, the economy will struggle to meet the IMF forecast.
Certainly the IMF agreed with the Fed in saying the economy’s on a slow-growth path that will keep the current low rates on hold for some time (an "extended period" as the Fed has been saying since December 2008).
In fact the IMF is disagreeing with the Bank of International Settlements which this week called for interest rates to rise and greater austerity measures in many economies, including the US.
