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The U.S. has become the most significant consumer in the world when it comes to demanding finished goods and discretionary items. Now, however, U.S. consumers are holding on to their wallets a whole lot tighter. You can see that clearly in this week’s announcement of December retail sales …
The figures sank by 2.7% — more than twice the expected rate of contraction. And keep in mind this was during the Christmas gift-buying season. Ouch!
And there’s further evidence of a sharp consumer slowdown all over the place …
For example, take a look at what economists call the “marginal propensity to consume.” In other words, the amount consumers are willing to spend per each extra dollar of disposable income.
Even though disposable income rose through October and November, personal consumption expenditures FELL during that time period. This is new. And this is big.
Reason: It demonstrates a major psychological shift on the part of consumers.
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| U.S. consumers have been the most significant in the world. But now, they’re holding on to their wallets a whole lot tighter. |
No doubt the newly frugal U.S. consumer is going to put a dent in overall U.S. economic growth.
But that’s NOT necessarily going to drag down the U.S. dollar!
Here’s why …
Cut Backs in U.S. Consumption Hit
Export-Dependent Economies Harder
Sure, slowdowns in U.S. GDP correspond to slowdowns in U.S. consumer spending. But considering how unbalanced global trade has become, the U.S. economy feels less pain than the global economy when Americans stop buying.
This sends me to the importance of a domestic demand base …
I’ve been focusing heavily on this in my analysis of emerging market economies and their currencies. That’s because I believe the most crucial point in the outlook for these markets is their obvious lack of domestic demand.
Not all emerging markets lack any semblance of a consumer sector or neglect investing in their own economies. But there are a whole slew of emerging market countries that have ignored making domestic investments.
These are the same countries that — in the last five years when times were good — stumbled upon magical growth rates and sucked in abundant amounts of overseas investment capital.
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Simply put: They lack domestic demand because the ruling powers refused to invest in their own people. Instead they focused solely on exporting and investing their surpluses abroad. Now … their export markets have cut back buying. And there’s not enough domestic demand to stop the bleeding.
This is what separates the U.S. from its competitors during times of disappearing demand and receding global capital flow.
And it’s not just the emerging markets where the U.S. possesses an advantage. It’s any export-reliant economy that’s going to suffer in an environment where demand vanishes and asset prices plunge.
China and Germany are two countries at the top of this list. Their economies depend heavily on exports and U.S. demand:
- In China, even imports are dropping. But more notably … their exports fell for a second consecutive month in December (the first time in the last decade) by 2.8%.
- In Germany, November export figures tumbled more severely … by 10.6% from the month prior.
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| The falling U.S. trade deficit is a sure sign that dollars are coming back to our shores. |
A Sure Clue That
This Trend is Ongoing …
Watch the U.S. trade deficit. And watch it narrow substantially.
Figures for November came out just this week. And they show that our trade deficit fell to $40.4 billion from $56.7 billion … far more than the consensus estimates had anticipated! This is a key sign that global economies relying too heavily on exports have a tougher road ahead.
Such an improvement in the U.S. trade deficit tells me that dollars aren’t leaving to flood other markets and fund overseas investment. In fact, they’re coming back to our shores … a sure argument for why the U.S. dollar is in a position to appreciate … despite the global recession.
Best wishes,
Jack
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