Commerce Department statistics for January signaled an increase in consumer spending. Great news for the economy, right? Well, not so fast. Problem is, households appear to be raiding the piggy bank and reaching for the credit card again to cover the tab, and that doesn’t bode well for the future.
Economists have waited breathlessly for the return of the consumer to energize the tepid recovery. That is because the United States depends heavily upon consumption spending, which constitutes nearly 71 percent of total economic activity. No other modern nation has anything like that level of dependence on
household expenditures; European spending, for instance, makes up only 57 percent of their output.
This disproportionate reliance comes at the expense of capital investment and to the detriment of future growth. Delaying gratification today (savings) provides resources for investment in factories, technology, research and human capital to generate higher levels of output down the road. Last year, the U.S. devoted just 13 percent of its gross domestic product (GDP) to capital investment. In other words, we are eating our seed corn.
Contrast that imbalance with our friends in China. Personal consumption spending averages 35 percent of GDP (half of our rate), while investment totals over 40 percent. Little wonder that their economy is expanding at four times the rate of the U.S. They are notoriously good savers, socking away 38 percent of their household income. Think of those savings as rocket fuel for their economic engine.