US consumption slowdown 0 comments

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This may be a trend that has been running full-blast in the press for the last month but it is worth reiterating, for the sheer scale of its impact on the global economy.

Consider the impact of the US on world trade. From 2005 WTO statistics, it is the world's leading merchandise importer (ie. interpret this as demand generator) with a 20% share by value, about 2.5 times that of the next largest individual country (China). Consumption expenditure accounts for about 70% of the total US economy (they're a nation of spenders), and this manifests itself in its share of world private consumption (ie. end-demand, non-governmental, non-investment) expenditures: North America, with 5% of the world's population, accounts for >30% of total world private consumption expenditure (see below, year 2000 figures). One can take the US to account for ~80% of the North American share, which means the US alone generates the demand for about a quarter of the world's consumption goods.


Consider the recent major consumption trends in the US. Housing prices down, squeezing the sources of liquidity for American consumers (they have traditionally borrowed against the rising values of their homes). Growing evidence of weakening consumer sentiment and sales data. Slowing manufacturing activity, reflecting itself in slowing orders. Unintended finished goods inventory accumulation across certain sectors, such as automobiles and electronics --- evidence of unexpected slowdown and possibly excess production capacity in the future. In terms of fundamentals, liquidity and sentiment, the outlook for US consumption does not look good.

So what if inflation is down and the US is likely not to have further rate hikes? This is due to demand slowdown removing the need for it, and the context for Asian exporters should be to look at the slowing demand, not the US Federal Reserve's counter-response to it.

A possible factor that might jolt the world into sudden realisation of this situation is a drop in the US dollar. Finally, the US dollar is beginning to react to the ballooning trade deficit that has been accumulating for years. There are signs that China is looking to diversify its foreign reserves investments away from US Treasuries, which had hitherto been supporting the US capital balance. In recent weeks, the US dollar has been plunging against all major currencies: the Euro, the pound, the yen, even the renminbi (albeit less because the float is managed). Look out for the US Treasury + Federal Reserve delegation to China sometime this month. It is seldom that the fiscal and monetary regulators, who are supposed to operate independently, go on a trip together. It is possible that major discussions could be planned regarding the future direction of the mutual exchange rates and foreign reserves. Any currency revaluations could have major implications for US consumption, and ultimately the global demand.

That is why the general outlook for exporters is bad. The general hope is that the handoff in demand growth from the US to the rest of the world (eg. Europe, a recovering Japan, maybe China) will be smooth. But how can it be, considering the general tendencies of these second-tier countries to protect domestic producers, and to themselves rely on exporting to the US to drive economic growth?

Key sectors to avoid must be export-oriented industries that depend on low production costs as a competitive strength, or which have volatile industry dynamics. The former would be manufacturers with low value-add that are based in China and which supply to the US (one sector that comes to mind is the furniture manufacturing industry). Any currency revaluation would erode this competitiveness, and weak end demand exacerbates the situation, especially for high-ticket, and therefore price elastic, items. An obvious example of the latter category would be the electronics exporters, where inventory overbuild and production overcapacity are perpetual cyclical problems (even in boom times) that often lead to sharp drops in average selling prices. Perhaps that is why there has been no Christmas stock market boom relating to the technology sector in the SGX this year.

References:
(1) WTO World Trade in 2005 Overview: Leading exporters and importers in world merchandise trade
(2) Worldwatch Institute: State of the World 2004: Consumption By the Numbers