It is official: the American consumer, for so long the main force driving the global economy, has cracked. Figures released on Thursday October 30th showed that America’s economy shrank at an annualised rate of 0.3 percent in the third quarter. The story behind the breakdown was a far sharper decline in consumer spending, which makes up around two-thirds of GDP. It fell at an annualised rate of 3.1 percent, the first decline since 1991 and the biggest drop since 1980. Capital spending by firms also drooped, with house building still the weakest link.
Spending growth is unlikely to resume soon. Earlier in the week the Conference Board, a research firm, said that its index of consumer confidence fell to its lowest level since the survey began in 1967. The drop is alarming but not surprising. American consumers could not withstand repeated blows to their financial wellbeing indefinitely. Household wealth has shrivelled. Stockmarkets are down by around a third since the start of the year. House prices in 20 big cities fell in August at an annual rate of 16.6 percent according to the S&P/Case-Shiller measure. The continued fall in property prices has left a large and growing fraction of households underwater on their home loans.
The unemployment rate has risen to 6.1 percent and is set to continue upwards. Ford and General Motors, as well as Whirlpool, an appliance manufacturer, are among big American firms that have announced job cuts recently. Employment figures due for release on November 7th are likely to show that around another 175,000 jobs were lost in October, pushing the unemployment rate up to 6.3 percent, according to a survey of forecasts by Bloomberg. Fewer jobs mean lost income and less spending.
During past recession scares any shortfall in income from jobs and investments could be bridged by a bank overdraft or loan. But credit is now scarce. Banks, fearful for their own survival, are loth to lend to anyone (even each other). Consumers are hardest hit by the dearth of credit partly because the value of the homes used as security for loans has plummeted. Unsecured loans are harder to come by. Before the crisis, consumer credit had grown by around 5 percent a year. In the year to August, it fell by 3.7 percent. In any case lost wealth is likely to encourage consumers to save harder and curb spending further. Those who can live without credit are likely to shun it.
Some brighter signs exist: America’s trade with other countries added around one percentage point to GDP. Stocks were cut at a less savage rate than recently too. These small pluses meant the retreat by consumers and firms did not drag the economy down by more. But firms starved of credit, short of cash and worried about future demand can scarcely afford to maintain fat stock levels. And the outlook for foreign sales is darkening too. Europe and Japan are close to recession, if not already in it. Emerging economies that have been greedily buying America’s wares now have troubles of their own. The dollar’s recent revival will make America’s exports dearer.
The upshot is that the economy’s backwards step in the latest quarter is likely to be followed by another, far bigger one as the year ends. Economists at JPMorgan Chase reckon that America’s GDP will decline at an annualised rate of 4 percent in the fourth quarter and fall again by 2 percent in the first three months of 2009. Household spending is set to follow a similar pattern. After a long unbroken spell of spending growth, consumers in America are finally shopped out.