Global Economy: When US consumers Spend Less, Singapore is in Trouble

The Source: http://www.creditwritedowns.com/2009/02/us-consumer-spending-down-1-in-december.html

U.S. consumer spending contracted more than anticipated in December 2008, declining by 1.0%. However, this number is a look into the past and does little to help predict how spending will trend going forward.

My read on future trends has much to do with trend consumption patterns an debt. On Friday, I reported that GDP showed a sharp deterioration in durable goods spending. In that post, I mentioned that the unsustainable increase in consumption as a percentage of GDP is moving back toward trend. Moreover, this consumption has been partly debt-fuelled; Debt to GDP levels have also increased markedly over the past decades to unsustainable levels. Now, that we are in a sharp downturn where credit is restricted, this pattern cannot continue.

Therefore, I see this report, in conjunction with these other data points as confirming the trend toward increased savings, increased debt reduction and lower spending in the U.S. going forward. Given the level of job losses is still increasing, we should expect consumption to decrease even more going forward.

See the Bloomberg video below for another take on the numbers and their implication for the broader economy by Carl Weinberg of High Frequency Economics. You should note he has some scary words on Japan and their predicament but more upbeat words on China.


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Comments: -


The US Economy is worth some 14 Trillion USD and represents at least

17% of the world's GDP according to CIA Factbook. (https://www.cia.gov

/library/publications/the-world-factbook/geos/xx.html).

US Citizens consumption contributes about 70% to the US GDP, or roughly

12% of the world's GDP.

When the USA sneezes, the world catches a cold.

The latest published data shows that disposable income decreased by 0.2%,

while consumption has fallen by 1%. This means that consumer confidence

has fallen. Consumers are now much more worried about the future

economic outlook of the country.

And consumers are cutting back on discretionary spending. They are either

borrowing less or saving more.


What is the relevance?

When US consumers cut back on discretionary spending, we really do not

know which area they will cut back on, but it is safe to assume that many

sectors and industries will be affected, especially big ticket items such as

Cars, houses, etc. And demands on imports is likely to fall. That means

Countries that export to the USA will likely take some heat from reduction in

demand from the USA.


Is Singapore Affected?

Yes, Singapore is a very open economy and depends a lot on trade and

exports to the USA. Reduction in US consumption will hit our manufacturing

sector hard. Singapore along with many Asian countries will need to rely on

their country's fiscal, Exchange rate, interest rate, Credit and tax policies to

pull them out of the woods, including stimulating domestic demand. Many

countries such as Singapore who has a reserve buffer are now using that to

create a soft landing.


Confidence

The key to sustaining the economy will still be confidence. People need to

feel confident of their jobs, their lives and so on, before they are to start

consuming again. If Confidence is gone and not propped up, the economies

will spiral downwards in a vicious circle.


Superfluous Demand

The global economy has developed into so many facets. Many of the jobs or

products of services were unheard even some years back. Services that are

not critical to a person's core needs will likely be hurt in such a slow down.


Likely outcome

There will be some form of "return to basics" in the economy with core

needs taking on a bigger importance relatively speaking. Therefore some

industries such as primary food production is likely to be cushioned from the

economic fall-out. The malfunctioning of the financial markets will lead to

some well deserved industries and small businesses being choked off from

well needed liquidity. If such businesses are forced to close, the impact

could be very serious. But we are hopeful that governments throughout the

world are already acting on this threat of a financial meltdown by doing all

they can to save the global economy. We are hopeful that 1 to 2 quarters

after the stimulus packages are implemented, we should see the bottom of

the economy.


My dear readers, fret not. Recession comes and goes, in a few years we will

have completely forgotten about this recession. So cheer up and go spend

some money and pamper yourself.

WATCH VIDEO