The Next Big Spenders

By Robert J. Samuelson
Wednesday, March 1, 2006

We may be close to a critical economic juncture. It's the moment when America's frenzied consumers relinquish their role as "locomotive" for the rest of the world. All that spending and borrowing have juiced the U.S. economy and, through swelling trade deficits, the global economy. We know this buying binge can't continue forever. Families and nations can't indefinitely overspend their incomes by ever-increasing amounts. Spending and income must ultimately move closer together, not farther apart.

Do not doubt the world's addiction to America's shopping spree. From 1996 to 2005 the United States generated almost 45 percent of global growth in consumer spending, says economist Sara Johnson of the forecasting firm Global Insight. That dwarfs the U.S. share of the world economy, about 20 percent. In the same years, the U.S. trade deficit ballooned from $191 billion (2.4 percent of gross domestic product) to $784 billion (6.3 percent of GDP). All those car and computer imports created jobs elsewhere. But now Johnson sees the process reversing. From 2006 to 2010, Americans will account for a shrinking share of global consumption gains, only 37 percent.

Purchasing power would slowly shift from consumers in Chicago and Denver to those in Shanghai and Sao Paulo. What we call "emerging markets" would increasingly drive the world economy. If this transition occurs -- a big "if" -- everyone would benefit. The U.S. economy would depend less on Americans' spendthrift habits and more on exports and investment. Johnson forecasts that U.S. exports will grow 8.3 percent annually from now until 2010, up from 1.7 percent from 2001 to 2005. Other countries would rely more on selling to their own consumers and less to Americans. The U.S. trade deficits might shrink without triggering an economic or political firestorm.

One way or another, we now face four converging trends.

First, American consumers are weary. Higher interest rates are hurting home prices; there will be less borrowing against hefty real estate gains, says Susan Sterne of Economic Analysis Associates. With rates rising on credit cards and mortgages, monthly debt payments in 2006 will also increase -- to a record 15.2 percent of disposable income, up from 14.3 percent in 2005, Sterne said. She expects weaker consumer spending, with growth of 2.6 percent this year; that's down from 3.6 percent in 2005.

Second, consumers in poorer countries are rapidly getting richer. Chris Holling of Global Insight figures that households with at least $20,000 annual income have firmly joined the middle class. In 2000 China had 52 million households above that threshold; by 2010, it will have 149 million, predicts Holling. For India, comparable figures are 20 million and 45 million; for Brazil, they're 13 million and 18 million.

Third, consumer borrowing is growing rapidly in poorer countries. From 2001 to 2005 it more than tripled, to $477 billion in just four countries (China, India, Brazil and Russia), according to Scott Bugie and Ryan Tsang of Standard & Poor's. By late 2009, they expect it at least to double, to nearly $1 trillion.

Finally, the Japanese and European economies have improved. Japan's revival is especially pronounced. Companies have paid down debt. Banks have reduced bad loans. By 2007 Japan could grow faster than the United States, economists at Goldman Sachs say.

Among today's economic worries is how to deal with massive global trade imbalances: U.S. deficits and big surpluses elsewhere. One possible answer is that other trading countries cure themselves of their American addiction. As people grow richer, their wants multiply. Industry looks more to meeting their demands than to generating ever-larger trade surpluses. The expansion of consumer credit (which is still tiny compared with that of the United States) encourages the process. People can move spending forward rather than saving for every big purchase. From 1997 to 2005, China's economy grew about 10 percent a year, but consumption grew only 6 percent annually; Global Insight predicts the gap will close.

Many multinational companies may help bring it about. Their investments in emerging markets increasingly focus on serving high-wage consumers as opposed to creating low-wage export platforms. In 2006 Wal-Mart plans to open about 40 percent of its new stores outside the United States. Procter & Gamble has almost a quarter of its sales in developing countries. Citigroup is reportedly negotiating for a stake in a Chinese bank from which it would presumably expand consumer loans. Already its personal financial business (mortgages and unsecured personal loans) in Asia outside Japan grew 50 percent last year.

For countless reasons, this benign outcome might not materialize: Asian countries might cling to export-led growth; sloppy practices in consumer lending might create large losses (that's already happened in South Korea); and even a slow reduction in U.S. trade deficits might not prevent a currency crisis. But at least there's one plausible path from today's unsustainable trade imbalances to a more stable future.


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