Ordinary Americans stopped spending in the September quarter, dragging the US economy to the brink of recession as growth contracted by 0.3%.
It was the second time in a year that the US economy has contracted, but this was the biggest fall since the 2001 slump. Economists say they now expect the economy to contract by 2% or more in the current quarter.
Battered by the credit crunch/freeze, losing their jobs by the thousands a week, the people who kept the US economy ticking over for decades have lost the will and the means to consume; the result is the sharpest slowdown in spending in 17 years, with the biggest fall in net disposable income on record and the largest fall in non-durable goods (food etc) orders for more than 50 years.
In short, American consumers have run out of money and are withdrawing to a defensive shell. They simply stopped spending in the quarter, with cars leading the way. Real estate, clothes, computers, travel, you name it, even food saw falls: retail sales were negative for the quarter and even if they had wanted to spend, getting credit was tougher; that’s if they still had a home and a job.
The latest economic growth figures from the US Government show an economy being crunched by some unwelcome firsts: the largest ever recorded fall in net disposable income, the biggest fall in consumer spending for 28 years and that 58 year low for non-durable goods output.
The first of three estimates issued overnight revealed growth shrank at an annual rate of 0.3% in the September quarter, after rising 2.8% in the June quarter and shrinking by 0.2% in the December quarter a year ago.
It was the biggest contraction since the US economy’s 1.4% fall in the wake of the tech and net boom in 2001.
Even though we in Australia face an uncertain year and a possible slump, we will not face the bitter and deep recession that Americans are now entering.
But it will get tougher here, which means lower sales for retailers, home builders and others serving the consumer. In our national accounts for the June quarter, consumption fell 0.1%, the first fall since 1991. In the US the fall was huge, 3.1%. That tells us something about the relative intensity of the two slowdowns and how we are currently positioned here.
Commentators said it was better than forecasts for a decline of 0.50%, but they are fooling themselves because the drop was driven by a such sharp fall consumer spending. As consumers account for 70% of US economic activity, it was a miserable outcome and it shocked economists by exceeding their gloomiest projection: a Bloomberg survey estimated a 2.4% fall in consumption.
The impact of the slump in consumer spending can be seen in spending on non-durable goods orders (food, paper, glass: consumer products) which slumped at a annual rate of 6.4%. In other words, some Americans bought less food and other essentials in the quarter than they did in the June three months.
Economists said that was the worst result since 1950.
Helping drive that slump and the fall in consumption was the an 8.7% fall in disposable personal income: the largest fall on record as US consumers lost their houses by the hundreds of thousands to foreclosure and their jobs: cuts of 30,000 alone were revealed in the US in the past couple of days.
And while non-durable good orders slumped sharply, so to did spending on durable goods, such as cars and furniture: the fall was an annual 14%-plus in the quarter: we saw that with drops in car sales of 11% in August and 27% in September.
The size of the slump was eased by a surge in spending by Government: up at an annual rate of 13.8%, double the 6.6% annual rate in the second quarter. But it wasn’t the sort of spending to ease the pain of job and home losses, it was defence spending, which doesn’t have the same impact as consumer spending. The $US120 billion tax rebate which buoyed second quarter spending and growth disappeared in the quarter and made the fall look a lot worse.
The country’s external account was again a positive factor, but while exports rose and imports declined, growth is slowing noticeably as the global slowdown cuts demand for US goods and the recession chokes off US domestic demand for imports from countries like Japan and China.
Business investment fell 1% after rising in the second quarter and spending on residential construction again fell. If previous GDP estimates are any guide, we will get further changes in the next two readings from the Government with more up to date information on trade and consumer credit. The contraction in growth fully justified the Fed’s pessimism in its post rate cut statement.
The news came less than a day after the Fed cut interest rates by 0.50% to 1%, and after consumer confidence plunged to its lowest level ever in the respected survey from the US Conference Board. That’s being driven by the rising jobs toll among ordinary Americans.
Jobs are still being lost across the US, the big car industry manufacturer, Tenneco said it would close several plants, Borg Warner, a car supplier is cutting production and laying off several hundred employees, Goldman Sachs is cutting 32,00 jobs and this week the big whitegoods maker, Whirlpool revealed plans to cut 5,000 jobs as it slashed sales and profit forecasts. GM has revealed its cutting a quarter of US white collar staff.
Chrysler revealed late last week that it was laying off 25% of its white collar staff in the US and Europe and cutting production. That will also be 5,000 jobs. The latest jobs figures will be out after the president poll. They will be issued a week tonight, our time. And mobile phone group Motorola is chopping 3,000 jobs, Amex, the card giant, said it was cutting 7,000 jobs in the US and around the world.
As of September, 760,000 jobs have already been lost this year, according to the monthly unemployment and employment data from the US Bureau of Labor Statistics. Another update is due a week tonight. It will be terrible and possibly see over 200,000 jobs shed in October, after 159,000 were cut in September.