Business of America is not consumption

November 26, 2010

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala — If you think that the business of America is consumption, then sit back, enjoy the Black Friday sales and take heart from the recent upbeat data on spending and income.

If, on the other hand, you think the future of the U.S. is going to have to be productive industries which throw off the cash flow that funds the paychecks and pays for the $5 made-in-China Barbie dolls at Wal-Mart, then perhaps you had better take note of the sharp slowdown in orders for durable goods.

The contrast between consumption and investment really could not be more stark.

The U.S. Commerce Department said on Wednesday that consumerspending rose by 0.4 percent in October and also upgraded spending growth in September to 0.3 percent. Incomes rose by 0.5 percent in the month, one of the best such showings this year.

This, in combination with fewer first time jobless claims than expected was enough to drive U.S. shares up by more than 1.0 percent on Wednesday, despite continued funding and banking woes in Ireland and elsewhere in Europe.

To be sure, in an economy where consumption accounts for more than 70 percent of gross domestic product, growing income and rising spending are good news, or rather will tend to temporarily mask the underlying issue of too much debt serviced by too little income.

That, it is now crystal clear, is the game being played by the Federal Reserve in launching its second round of quantitative easing, the minutes of the central bank’s most recent meeting show:

“Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate.”

The key concept in terms of the consumer is the hope that higher asset prices will drive an economic recovery, the unstated idea underlying this being that people will spend more if their retirement savings and houses have risen in value.

It is the same medicine that made the U.S. economy so sick, but the dosage is being upped nonetheless.


So, consumers are spending and the Federal Reserve has a plan to entice them to do more, perhaps even driving down the current 5.7 percent savings rate.

What is far less apparent is where the ultimate income will come from to service the debt and finance the consumption.
Perhaps more meaningful over the medium term is other data released by the Commerce Department on Wednesday, a durable goods report that was very poor but which got little attention.

Non-defense capital goods orders excluding aircraft, a shorthand for business investment, dropped 4.5 percent in October after rising by a revised 1.9 percent in September.

Markets had expected about a 1.0 percent increase and indeed, if single economist made a forecast as low as the result I have not been able to find her.

Overall orders for durable goods fell by the most in almost two years, falling by 3.3 percent to a seasonally adjusted $196 billion. Remarkably, all industrial new order components declined, making it hard to argue that this was a fluke in this or that volatile sector.

What seems to be happening is that inventory restocking, building up stores of goods in hopes of future sales, is finally winding down after having driven economic growth for most of the year. Inventories rose by 0.4 percent, rising for the tenth consecutive month, but by a bit more than half the rise in September.

It is extremely hard to see inventories rising in November and December with new orders doing what they are doing. The three month trend is still strong, but that does not preclude the possibility that we are coming to the end of an inventory building recovery. If businesses begin to actually run down their inventories as a defensive measure, it is possible that the fourth quarter will mark the end of what will prove to be the weakest modern U.S. economic recovery ever.

If that happens, the Fed’s decision to buy bonds will be confirmed, but not because it helped employment grow or sparked a consumption-aided acceleration in the economy.

Instead, it will be because QE will prove to be one of the few tools left to fight deflation.

At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.


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Some believed and were fooled by the buy, buy, good by of the previous political leaders. I do believe that we will see a return to less advertizing and more reliance on paying for things outright, without payments. I believe that we will also see a return to a value system of former times and a rebuilding of long term family relationships.

Posted by fred5407 | Report as abusive

What rubbish.

Mr. Saft: If you are determined to paint an apocalyptic future for the US economy, you had best base it on something less erratic and ephemeral than Durable Goods orders. I have been watching this number for over twenty-five years and analysts NEVER get it right. An aircraft order here or there and the numbers get skewed, big time.

Your essential problem, as with all gloomdoomers, is that, aside from housing, the recent economic stats seem to portray an economy that’s shaking off a mid-summer slump and may hit hit the ground running quite strongly in 2011. Not so good if the only angle you have – which has been apparent from your columns for years – is that of impending economic disaster. The world has moved on! Get with the program, Mr. Saft.

Posted by Gotthardbahn | Report as abusive

This post addresses Gotthardbahn’s rubbish.

Interesting you should mention airline orders. China will release its single-aisle C919 with up to 190 seats in 2016. How many orders do you think Boeing will receive from Asia after that?

The USA has a true unemployment rate — U6 — of 17%, and this rate has not significantly changed in many months. Compare that to Germany which now has its lowest unemployment rate since reunification. This is important because Germany is the #2 exporter in the world; the USA used to manufacture the durable goods Germany does today.

More and more factories are being built in China, India, Vietnam, and other former third-world countries. No factories are being built in the USA, but lots of them are closing and being moved overseas.

I’ll take Saft’s opinion over Gotthardbahn’s any day.

Posted by saucymugwump | Report as abusive

saucymugwump: Oh please.

Regarding German unemployment: So you dismiss US government employment figues yet you wholeheartedly embrace German government employment figures. You believe one and not the other, in line with your preconceptions. Interesting.

U6: Sure, whatever. Perhaps if American students graduated from high school – assuming they even finish – being able to at least read and write, perhaps employers could hire them.

Factories are being built overseas because unionized American labour got greedy and killed the golden goose. Face reality.

As for this Chinese aeroplane: Aircraft is one of the few things that American manufacturing does right and customers will recognize that. Boeing will welcome the competition as it will make their products look even better. Airbus? Talk to the airlines that had to replace the engines on the new Airbus ‘flying hotel’.

Posted by Gotthardbahn | Report as abusive

Gotthardbahn wrote: “You believe one and not the other”

I believe in ball park figures and generally accepted norms. No one is saying that unemployment in the USA has changed for many months, while everyone is saying that Germany’s unemployment is drastically reduced. Germany is the #2 world exporter, while the USA is falling fast. It is you that lives in a fairy tale.

Gotthardbahn wrote: “U6: Sure, whatever”

Just because your bias does not allow you to understand it does not make it any less valid.

Gotthardbahn wrote: “because unionized American labour got greedy”

That’s certainly one factor, the only one Fox News viewers understand. There’s also government support of outsourcing. Read “Rules for Congress Curb but Don’t End Junkets” at
for just one example. The part about Danny K. Davis is the best.

Gotthardbahn wrote: “Boeing will welcome the competition”

You have your blinders screwed on very tight. China has stolen many German industrial secrets and coerced others. Try reading the below Der Speigel stories:

and view the following Deutsche Well video:

and read the following Guardian story:
jul/22/germany-china-industrial-espionag e

and read this story from Parameters, the U.S. Army War College:
Parameters/Articles/2010summer/Thomas.pd f

But I don’t know why I bother. Your mind is closed to anything that does not meet your preconceived notions.

Posted by saucymugwump | Report as abusive

James Saft is correct as unfortunate as it may seem we have all but maxed out our respective leverage. The basic disparity in consumption vs. production trends are all but insurmountable given the current situation we would need some breakthrough in science/technology to rival the invention of the wheel as a saving grace.

Posted by Iterate | Report as abusive

american companies have been increasingly making their goods and even providing their services overseas. Their profitablility has increased at the cost of increased unemployment at home.
so how are american consumers getting money to spend other than borrowing. by holding shares of american companies manufacturing and selling abroad and ofcourse from the government.
soon the govt will have to cut back dramatically to rein in the debt. this will add to both public and private sector unemployment and the reduction of various subsidies will take away further spending power.
it is a negative spiral for america but not neccesarily for american companies provided the markets in emerging countries take up the slack from america (and europe)

Posted by shivers1 | Report as abusive

[…] This post was mentioned on Twitter by nalit patel, james saft. james saft said: Black Friday, bah humbug. Latest column. […]

Posted by Tweets that mention Business of America is not consumption | Analysis & Opinion | — | Report as abusive

I am getting really tired of people who have money and no worries going around pretending the economy is fine and going to great lengths to cover up the truth. We have no jobs here, and so lots of people are being forced to go back to school, only to have tuition fees raised on them. Its insane. Ive been unemployed for years now and unable to even get my foot into the door at even the lowest of jobs. We need industry in this country and im sorry but unions may me corrupt and greedy in their own way, but without a union you arent even entitled to a lunch break or even a decent work environment. This country should not be going backwards, we need to make a living wage and stop allowing for the cost of living to skyrocket without minimum wage doing the same. This isnt a 3rd world country, so we should stop expecting Americans to give up their rights in order to work.

Posted by BonzaiBetty | Report as abusive

Peru Restaurant Sumaq
Likewise, the restaurant Sumaq is committed to promote the folklore and the region of Cusco, so every Saturday organizes the live performance of different artists from our region.
The area in South America known today as Peru was once part of the great Inca Empire as were parts of Ecuador, Bolivia, Chile and Argentina.

Posted by incatrail212 | Report as abusive

If you live in an average non-Washington town in America, you know things are not right. The jobs have left, actually started over 10 years ago, the buying power of the average American is compromised, the future of our children is not clear and we continue to argue about the cause. It does not matter who messed things up, we just need to get manufacturing and new technology back in the USA and put our people to work with self respect. Saft is correct in his assessment of what is happening to us. We need to stop the posturing.

Posted by capinfergie | Report as abusive

“consumption accounts for more than 70 percent of gross domestic product”
It doesn’t take a math wiz to see that we’re consuming more than twice as much as we’re producing. How does someone consume more than they produce?
Beg, borrow and steal, that’s how.
The 70 percent bubble is what burst and nobody is going to reinflate that bubble.

Posted by Williamwyzyx | Report as abusive

“soon the govt will have to cut back dramatically to rein in the debt. this will add to both public and private sector unemployment and the reduction of various subsidies will take away further spending power.”

This is exactly what the multi-layered administration cannot really meaningfully achieve.

And history has almost falsely guarantee the American public that things will bounce back sooner or later.

WRONG. This time is very different. The great U.S.of A. will realize it too late and will be relegated to a position not even the worst nightmare can portray. If you believe QE can solve today’s quagmire, GOOD LUCK!

Americans have been pampered for too long and it’s payback time.

Posted by doctorjay317 | Report as abusive

[…] Business of America is Not Consumption […]

Posted by Monday | Allied Public Affairs | Report as abusive

Gotthardbahn, the shift of manufacturing was because of labour greed? *laughs*

Labour costs in a country were supply and demand. Nafta was supposed to increase the flow of trade, not to get cheap labour. (supposedly…)

Sweat shops in America are illegal and yet still legal elsewhere, so the greedy businesses who moved did so for cheap labour AND also because their emission problems and environmental concerns were encroaching so now those are other countries problems!

Although the rich and Wallstreet quickly shrugged off the recession, and economist models were quick to declare it over, the repercussions and monetary hardships are still very real and in effect going to hurt for another 10 years.

There is no innovation and industry in America. the only thing expanding is your waists and the only thing exceptional is how ineffectual America has become other then making false markets on wallstreet. Oh and making war…

It ain’t over ’til it’s over, Gotthardbahn.

Posted by hsvkitty | Report as abusive