The popular economic hope, shared by Washington, Wall Street, manufacturers, retailers and many academics, is that the consumer will pull the rest of the economy to higher ground.
And so, two little news items of recent days assume significance:
First, economic productivity, or the efficiency of output, rose sharply in the April-June quarter. Then, for the first time in more than three years, the monthly use of consumer credit shrank rather than rose.
At first glance, both seem positive. Rising productivity means higher living standards. And saving something for the future, rather than borrowing and spending, is viewed as necessary to finance economic growth.
But in the current situation, the reverse may be true.
Productivity rose largely because industry managed to maintain output with fewer workers.
Earlier in the economic expansion, rising productivity allowed industry to profit while paying more workers more money.
And, while a shrinkage of consumer credit would have been welcome three years ago when the savings rate plunged below zero (though the numbers have since been revised to show it remained positive), it now rouses fears that the consumer will drag down rather than pull up the economy.
If that becomes the case, the economy must look elsewhere for leadership. To business perhaps. But businesses, having overestimated the size of their markets, have already revealed their unwillingness to lead.
Business leaders already have shown they’re unwilling to embark on capital spending and expansion plans without assurance the market for their goods will be there. And the market is the end user, the consumer.
Conceivably, the consumers’ lost jobs and lost stock market wealth could also dilute whatever stock market recovery develops.
Economist Peter Hooper of Deutsche Bank comments that in the late 1960s, mid-1970s, and mid-1980s, sizeable reductions in wealth, mainly from stock market losses, preceded big increases in savings.
Increased savings, while desirable at other times in economic history, are not part of the expansion menu being described today by forecasters. Spending is. But Hooper suggests instead that savings might rise.
His reasoning is bolstered by experience in prior years, when rising unemployment spurred precautionary savings, a factor that was all but absent during the days of rising stock prices and assured incomes.
The test of how consumers will behave – spend or save – may come with the tax rebate checks now being received, and which will suddenly boost household disposable income. Will they spend or save the money?
In the past, says Hooper, tax changes initially have been largely absorbed in saving. In 1975 and 1985, the savings rate jumped when taxes were cut. And they dropped in 1969 and 1987 when taxes were raised.
For such reasons, he looks for only “an anemic (economic) pickup in growth by historical standards.”
But, of course, the decision lies not with corporate chiefs, who are waiting to see, or academics or economic forecasters, but with the consumer.
He and she will let us know their decision over the next couple of months.
John Cunniff is a business analyst for The Associated Press