The United States has been the locomotive of the world’s economy. Specifically, in recent decades, the spending by the U.S. has been the driving force behind most of the economic growth in the United States and worldwide. In this regard, the U.S. spending has accounted for as much as 70 per cent of the nation’s $14.1 trillion economy and has been the single largest driver of the world demand for imports of goods and services. In fact, the U.S. imports have accounted for over 15 per cent of the total world import demand, much of which has been consumed by the U.S. households. However, despite the early signs of the economic rebound in many developed nations, trends in consumer spending in the United States suggest that the global economic recovery will be lacklustre at best.The U.S. consumer spending in the coming years will remain subdued for several reasons:1) Extended losses in household net worth, as deflationary pressures persist and housing and stock prices continue to decline. To date, the bursting of the housing bubble and equity-market losses have erased an equivalent of an annual GDP of the United States. In the past decades, rising household wealth, driven primarily by the growing home values, had a positive effect on spending, and therefore on demand for imports. The collapse of the housing market and the prospect of continued declines in housing prices suggest that the negative effect of household wealth losses will persist, exerting the pressure on the U.S. consumer and therefore suppressing demand for imports of consumer goods and services.2) Stagnant or declining household income due to rising unemployment. The U.S. unemployment rate has reached 9.4 per cent, with a prospect of a 10 per cent rate by the end of this year, despite the signs that the U.S. economy is coming out of the recession. Job losses, estimated to peak at over seven million by mid-2010, and declining household incomes will have a significant negative effect on consumer confidence and spending.3) Slower credit growth than in earlier years. The rapid credit expansion in the United States, which boosted consumption, had been driven in recent decades by rising housing values. The collapse of the housing market and the consequent end to cash-out mortgage refinancing that earlier accompanied the periods of growing home values has ended the huge thrust to consumer spending from the rapid credit growth. Moreover, significantly tightened lending standards have suppressed credit expansion, stifling consumer spending.4) Increased savings. The U.S. personal savings rate has already increased to over 5 per cent, the highest in fifteen-years. The upward trend in the savings rate is indicative of the U.S. consumers’ higher propensity to save because of mounting job losses, falling incomes, and increased financial insecurity. Altogether, these factors have contributed to slower rates of growth in consumer spending and have weakened demand for foreign consumer goods and services.Therefore, the current trends in the U.S. consumer spending suggest that the expectations of a return to strong economic growth in the United States are unrealistic. The same holds true for most world economies, especially for those that are highly depended on demand from the United States. The retrenchment of the American consumer is therefore likely to keep the economic growth worldwide subdued for the next several years.Ireland relies heavily on the U.S. economy, both from the perspective of direct investment, and as a marketplace for our goods and services. The longer spending power remains suppressed across the water, the longer the Irish economy will have to await recovery. Such is the nature of the global economy and Ireland’s deliberate and calculated openness. What we need going forward is a more resilient and coherent strategy such that we can stand on our own two feet and drive our own success more directly.

Most of the time in American history it’s been a good thing that Americans love to spend, a good thing that consumer spending accounts for 70% of the U.S. economy.Remember the recession of 2001? After the September 11 terrorist attacks drove consumers inside in fear, the consensus was that the recession could not help but worsen into the next Great Depression. But the Bush Administration issued emotional appeals for consumers not to huddle in fear but to come out and spend the economy out of recession – even if they had to borrow the money to spend, to “show the terrorists they cannot destroy the U.S. economy”.It worked better than anyone could have expected. Households were provided with tax rebates and bonuses to spend. Interest rates were dropped and easy money loans were made available. Consumer spending not only pulled the economy out of recession but continued to do the heavy lifting, as businesses remained reluctant to spend until well into the recovery.Unfortunately, the call for consumers to spend more, and the release from guilt provided by the suggestion that borrowing to spend was a good thing, unleashed reckless spending that not only salvaged the economy but eventually produced record credit-card debt, the housing bubble, refinancing of mortgages to take out equity for still more spending, and a euphoria about the good times that was the forerunner of the subsequent financial meltdown.Currently it’s not such a good thing that consumer spending accounts for 70% of the economy. This time around fearful consumers are already head over heels in debt, wiser regarding the temporary illusion of good times financed by borrowing, and determined to pay down debt and save rather than spend.
That is producing darker clouds over the already faltering economic recovery.While reports that McDonald’s or Starbucks are doing well lifts hopes, it’s the warnings and disappointments this week from the likes of Proctor & Gamble and Unilever, producers of consumer goods across a broad section of products that tell the real story.It also showed up in the 2nd quarter earnings reports. While earnings mostly beat Wall Street’s estimates, much of the gains again came from lay-offs and other cost-cutting. There’s only so much cost-cutting that businesses can undertake.Standard & Poor’s reports that while most S&P 500 companies beat earnings estimates, sales at one in five companies missed their revenue estimates. Bruce McCain, chief investment strategist at Key Private Bank says that consumers are spending 60% of what they normally spend during an economic recovery.Also not good news for the U.S. economy, many of the companies reporting the biggest earnings gains generated most of those earnings overseas and from exports, not from sales in the U.S.Against that backdrop, retail chains are reporting their same store sales for July today, and so far they are less than stellar, particularly considering the comparisons are to July of last year when chain store sales fell an average of 5%. So far, of 28 retailers tracked by Thomson Reuters17 reported lower than expected sales, while only nine beat the estimates.Among the winners Costco Wholesale (COST) reported its July sales were up 6% over July of last year. Limited Brands (LTD) reported a big increase of 12%. Macy’s (M) beat estimates with a 7.3% increase.But there are an unusual number of important disappointments. For instance, Aeropostale (ARO), a popular store with young people, reported its July sales were only up 1% over July of last year, missing estimates of a 7.1% increase. American Eagle (AEO) sales were flat. At the other end of the scale Dillard’s (DDS), the upscale retailer, saw its July sales decline 3%. JC Penney (JCP) reported July sales fell 0.6% missing forecasts of a 3.4% increase. Discounter Target (TGT) sales were up only 2%, missing estimates. BJ’s Wholesale (BJ) saw its sales rise 2.8%, missing estimates of a 4.5% increase.The economy really needs consumers to spend, but consumer confidence was at its lowest level in nine months in July, and it looks like consumers are not only reluctant to buy homes and autos, but are now becoming reluctant to spend in the malls.