"Hey! Big spender," Shirley Bassey, larger than life singer from Tiger Bay, the port area of Cardiff, Wales, used to bang out with her voice as big as a battleship. And it's big ships we're talking about now, and the economy, which moves like one, slowing slowly, accelerating slowly, its speed at any time the result of levers shifted some time before and the state of the engine, and the wind and tide.
On Thursday, the U.S. Commerce Department gave news on the biggest ship of them all, the U.S. economy. Its speed has dropped. The problem is that it has lost its big spender. (And another big spender can't save it.)
In the fourth quarter of 2002, the U.S. economy grew at an annualized rate of 0.7 percent, well down on the 4.0 percent growth rate achieved in the third quarter. What this means is that the U.S. economy slowed down quite quickly for so big a ship in the second half of last year.
The United States annualizes its growth rates, converting the growth from the preceding quarter into an annual speed, a sort of miles per hour that we can all recognize. But to go back to the underlying statistic, this is what has happened: the economy expanded by about 1 percent in the third quarter compared to the second and then by less than 0.2 percent in the fourth quarter compared to the third. The big ship slowed a lot.
The ship slowed because that normally reliable creature, an animal of huge appetite, which travels by car, parks in malls, and returns to the car with a trolley or two, has changed his behavior a little: not enough, certainly, to be discerned by the naked eye, but perceptible through statistical analysis of his habits.
In the fourth quarter, U.S. personal consumption expenditure rose at an annualized 1 percent rate, well down on the 4.2 percent rate in the third quarter. The U.S. consumer, the big spender of the world economy, therefore increased his spending in the fourth quarter of 2002 but by a smaller amount than in any other quarter in recent years.
In 2001, for example, when the U.S. economy as a whole (as measured by gross domestic product) contracted for three consecutive quarters, the lowest reading for annualized growth in consumer spending was 1.4 percent, in the second quarter of that year. The minimal GDP growth of 0.3 percent recorded by the United States in the whole of 2001 occurred despite the fact that personal spending rose in that year by a respectable 2.5 percent.
That is why what is occurring now, a drop in the appetite of that biggest of big spenders, the U.S. consumer, source of more than two-thirds of demand in the world's biggest economy, is important. It could be a sign that the ship will slow further, to a standstill, to be drifted back by wind and tide; in other words, a return to recession. But before we look at the possibility of that, let us consider the other (less impressive) big spender, Dubya to some, and his role.
The U.S. government is not nearly as big a spender as the consumer, contributing less than one-fifth of demand in the economy. But one-fifth is appreciable and the U.S. economy would have contracted in the fourth quarter had it not been for yet another rise, of 4.6 percent, in government spending, as federal spending rose at an annualised rate of 10.1 percent. The increase in government spending contributed 0.86 percentage points of the 0.67 percent overall GDP growth rate.
Was it all defense spending as the United States fights terrorism and prepares for war with Iraq? No. Federal non-defense spending rose at an 8.3 percent annualized rate, but the defense spending growth rate was still higher, at 11.2 percent, and defense spending now makes up about two-thirds of federal spending so its influence on the overall government spending figure and therefore on U.S. growth was much greater.
So there we have it. The free-spending U.S. government, readying itself for war, and the still spending U.S. consumer kept the economy out of recession in the fourth quarter while investment and exports fell. But what now?
It is the bullish case, rather than the bearish one, that is built on the war. For the bulls, the slowdown in consumer spending is something temporary. Once Iraqi dictator Saddam Hussein has been removed, consumer confidence will revive, businesses will feel free to invest, and the economy will move ahead more quickly. The bulls can point, too, to the fact that in 2001 consumer spending was swift to pick up from a mid-year lull and rose by no less than 6 percent in the fourth quarter of that year.
Further ammunition for the bulls are the ultra-low short term interest rate conjured by Federal Reserve Chairman Alan Greenspan and the further round of tax cuts envisioned by President George W. Bush's $670 billion, ten-year stimulus package.
But there is also the bearish case, to us much more convincing. This case has less to do with the prospect of war and more to do with the big ship and changes that take place over time, the state of the engine, the levers that moved long before, the tide and wind.
In 2002, Americans saved 3.9 percent of their disposable income. That is not a high rate of saving by any means but it is much higher than the 2.3 percent of income saved in 2001--and more by far than the 0.8 percent of income saved during that last spending binge, in the fourth quarter of 2001, when discount prices and zero interest deals sent cars speeding out of dealerships.
These are the factors that are changing the speed of the big ship. After a period of free money, from the stock market in the second half of the 1990s, low saving and high spending, Americans are very slowly adjusting to a more mundane reality, a world in which, in spite of the efforts of rate-cutting Greenspan and tax-cutting Dubya, savings and spending money do not rain down from an ever-beneficent and prodigious stock market. The adjustment is only just beginning, but it is inevitable and necessary--even though Bush and Greenspan both do all in their power to prevent it.
Americans, companies and individuals, need to borrow less and save more. The U.S. trade deficit needs to fall. The economy needs to rebalance from the boom years. Pushing the ship to run faster, when it is not fit to, only risks worsening its imbalances and engine problems. Until the economy has rebalanced, it won't be able to advance at a good and sustainable pace.
For a while Shirley, with her brilliant, booming voice, is going to call in vain for her big spender. He was a swell fellow who used to entertain her royally on his credit card. Shame on him, he can't afford to any more. Now the only big spender around is a less appealing fellow called Dubya. He does have some money but he spends it mostly on war.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected]
