The hangover

A key economic signal is the conduct of the consumer. The latest data reveals personal consumption expenditures have been declining for two fiscal quarters.

Over the past four decades there have been very few instances when real consumer demand fell for more than three months. The situation is even more ominous south of the border, where there has been an extraordinary capitulation of the U.S. consumer, whose buying has fallen precipitously – the biggest declines since 1950.

Similarly, consumer demand has been slashed elsewhere. Japan and the European Union have joined North America in a consumer pullback. The economies of the developing countries have fared better. An outright contraction in their overall output-spending is not taking place, but a sharp deceleration is evident.

To paraphrase John F. Kennedy, troubles have many fathers, so it is not surprising that there has been much finger pointing, blaming the United States for being the trigger of this economic recession. However, the rest of the world has been complacent, more than willing to go along with the demand and pull from the U.S. consumer. Hence, the nations in the European Union and China have participated fully in this consumer-led mania.

What is taking place currently is not the normal business cycle. Much of the globe must come to grips with the post-bubble reality.

What will follow now? There will be an unwinding of the use of borrowed capital that was used to enhance earnings. This “deleveraging” will entail an extended downturn and will result at best in a subdued economic recovery.

The over-extended consumer will undergo a reversal in spending unlike anything since the end of the Second World War.

North American consumers are heading for a prolonged bout of retrenchment. Savings as a per cent of Gross Domestic Product in the United States are close to zero and consumer spending there represents more than 70 per cent of GDP. Here the numbers are less worrisome, but still excessively high. Canadian consumer demand is 55 per cent of Gross Domestic Product, and our savings rate is just over 13 per cent of our total GDP, one that definitely is inadequate to fund our much-needed, long-term investment.

It should be noted that in previous generations, consumption represented about 40 per cent of GDP, a number consistent with that of most other nations.

On the supply side, production in many parts of the world catered to now faltering consumer demand in North America and Europe. Production cutbacks, therefore, are inevitable, reducing the demand for our exports, such as metals, forest products and even oil. Especially hard hit will be the automobile sector, as so much of our vehicle output is exported to the United States, clearly in a recession.

It appears then, this recession will continue throughout the year, followed by a lacklustre recovery. All of this is the inevitable hangover from the absurd, consumer buying frenzy.


Bruce Whitestone