Washington - It’s up to the consumer to drive the US economy and lift world growth in 2012, and the outlook is far from encouraging.
Over the past three and half years, growth in US consumer spending has averaged a paltry 0.2% adjusted for inflation, the weakest in the post-World War II period, Morgan Stanley said.
While the employment picture is gradually brightening, wage growth is going in the opposite direction, keeping a lid on consumer behaviour. Over the past year, pay for blue collar workers adjusted for inflation fell 12 cents from the previous year, according to the Bureau of Labour Statistics.
That was the steepest decline since the stagflationary days of 1980. Pay for all workers has fallen 16c this year in real terms.
Consumer buying power, modest over the holiday season, remains constrained by heavy debt loads. Total US household debt as a percentage of disposable personal income is down from its 2007 peak at 130%, but it remains well above its 1970-2000 average of 75%.
As a result, Stephen Roach, non-executive chairperson of Morgan Stanley, sees US consumption remaining anaemic for years to come. That will place a drag on global growth, especially in Asia, a big manufacturer of US consumer goods.
“With retrenchment and balance sheet repair only in its early stages, the zombie-like behaviour of American consumers should persist,” Roach said.
Consumer spending rose 1.7% in the third quarter, far below the 3.6% it averaged in the decade before the 2007-2008 recession. So it is hard to see world growth accelerating significantly until the US consumer, who drives over 70% of US gross domestic product (GDP) growth, revives.
There are other factors holding Americans’ spending in check. The Federal Reserve last week reported early signs of tightening credit conditions, and government stimulus spending dries up this year. At the same time, uncertainty persists over the payroll tax cut and jobless benefits, which currently add 0.50-0.75 percentage point to GDP but are set to expire in February.
On top of that, businesses are pulling back on capital expenditure as tax breaks expire, while exports wane as a growth driver amid the upheavals from Europe. Most economists expect at best only modest US economic growth around 2% in 2012 despite a recent batch of encouraging data.
“The year ahead is fraught with risks,” said Tom Porcelli at RBC Capital Markets. “In fact, consumer fundamentals are decidedly weaker than this time last year.”
If the US employment report, due Friday, shows marked improvement, it would lift optimism. But most economists expect only gradual gains of 150 000 new jobs added in December, up from 120 000 the prior month.
Although the average pace of job growth has nearly doubled over the past three months compared with the prior period, it remains well below the 200 000-250 000 mark viewed as healthy labour market conditions.
Wages may rise too. They are forecast to have climbed 0.2% in December after a drop in November. But buying intentions remain weak.
The Conference Board reported in its US consumer confidence survey for December that even though overall sentiment has improved, those in the market for big ticket items like cars or houses mostly plan to buy used, not new -- a sign of extremely cautious attitudes.
That would explain why analysts forecast no acceleration in new car and truck sales data for the United States, due on Wednesday. They are seen holding steady at a 13.6 million annualised rate in December. Likewise, the ISM manufacturing index is expected to have ticked up only a slightly, to 53.2 from 52.7 in November.
“Still muddling through,” is how Macroeconomic Advisers summarised the economic outlook for 2012.
A recent growth spurt might have given the US economy some resiliency to withstand a eurozone recession, weakening stock prices, rising credit costs, fiscal drag and a higher dollar. But the United States, and with it the world economy, remains vulnerable to shocks in the year ahead.