QUERETARO, Mexico, Nov. 1 (UPI) -- After so much talk of recession it begins -- quietly. U.S. third quarter gross domestic product, reported Wednesday, contracted by only a fraction from the second quarter, an annualized decrease of 0.4 percent, which means output fell by about 0.1 percent. Consumers did not spend less in the third quarter than in the second; they spent more. That might be interpreted positively but this correspondent sees it as negative. Behavior has not changed sufficiently. Adjustment has hardly begun.
There is a strange apartheid in the U.S. slowdown. Investment is down and downtrodden. It fell at an annualized rate (raised, in this case, by a power of four) of 10.7 percent in the third quarter compared with the second. To give a perhaps more easily understood number than the annualized ones favored by the U.S. commerce Department, this means that real (inflation-adjusted) investment spending by the private sector was 2.6 percent lower in the third quarter than the second. And this was the third consecutive quarter in which investment spending has fallen by double digit annualized rates.
In plain terms, what is going on is that companies are slashing their investment spending because demand for their products is no longer growing rapidly, as it was in the 1990s, but falling; and falling not only in the United States but in the wider world. U.S. export volumes fell at a 16.6 percent annualized rate in the third quarter, or by 3.9 percent from the second quarter: a very big fall. Imports also plummeted, by 15.2 percent at an annualized rate, as U.S. spending on foreign goods and services fell away.
So that wraps up private investment and trade. They are way down. But on the other side of the divide life has not changed. The consumer has got wind of trouble but his life goes on much the same.
Consumer spending rose by an annualized 1.2 percent in the third quarter from the second. Consumer spending on durable goods, which you might have believed to have crumbled given the numerous reports of company sales in distress, rose by an annualized 1.7 percent. Divide these increases by four and you get a good approximation of the actual percentage increase in consumption between the second quarter and the third. Consumption went up just by a bit. But it still went up. The question is whether that is good or bad.
The U.S. economy thrived in the 1990s, boomed in 1998-2000. In these three years private consumption rose at average annual rates (after inflation) of 4.9 percent. That is very fast growth indeed.
Consumers benefited in those years from huge stock price gains. The stock market peaked in the first quarter of 2000 and has fallen since. Consumers don't appear to have let that worry them too much. Unemployment has gone up but is still very low by historical standards. Yet, in theory, so beleaguered is the consumer and the economy that in the third quarter the government felt compelled to return each consumer hundreds of tax dollars. Alan Greenspan, the Federal Reserve Chairman, has cut the main short-term interest rate to just 2.5 percent. Encouraged by low interest rates, house purchases have remained one of the pillars of the economy. And Wednesday, U.S. President George W. Bush urged the U.S. Senate to pass his proposals to add further to fiscal stimulus by cutting taxes some more.
This might all seem fair enough. Policy-makers are doing everything possible to prevent consumers from adding to the slowdown in the economy. But in that late 1990s boom, when the stock market racked up consecutive double digit gains, when house prices were soaring in urban metropolises, when consumption of consumer durables was rising at an average annual rate of 10.8 percent, was the U.S. consumer not consuming too much and saving too little?
The U.S economy experienced an asset price bubble in the second half of the 1990s. Consumers consumed their way through it. Now normality, which appears recently to have become normalcy: another worrying trend, must reassert itself. U.S. consumers must reduce their consumption and increase their savings. They are only just beginning to do so.
In the third quarter, savings as a percentage of disposable income rose to 3.8 percent from just 1.1 percent in the second quarter (and from an average of only 1.0 percent in 2000: a record low). Only when consumers are consuming less and saving more will the U.S. trade deficit narrow. Only when consumers are consuming less will companies know how much demand they should be catering for.
The bubble distorted the U.S. economy. Consumers, like stock prices and businesses, must come back to reality. So must property prices. So must levels of debt. These distortions have not yet begun to be corrected. That is worrying and explains why current economic policy is mistaken, and liable to turn recession into slump.
The bad news in the GDP report is that the consumer has still not changed his behavior by much. The financial markets expect the U.S. economy to emerge from its slowdown soon. The GDP report shows that the slowdown is only just beginning.
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