The spending power of the American consumer is the secret sauce for turbo-charging a world economy that has entered an uncomfortable soft patch. China last week cut its growth outlook for 2012 to 7.5 percent from 8.0 percent, the weakest pace since 1990 and barely strong enough to keep its huge labor force employed.
Brazil, which has been Latin America's powerhouse economy and heavily reliant on top trade partner China, is now struggling to revive growth after skirting recession last year. The central bank slashed its benchmark interest rate again last week to a nearly two-year low in a bid to stimulate growth.
In Europe, Greece's successful completion of a debt swap that clears the path for a second round of bailout money allowed the country to avoid a chaotic default that could have reverberated across the continent. But Europe still risks falling into recession as severe government cutbacks bite deeply. The European Central Bank now estimates the euro zone at best can deliver growth of 0.3 percent this year. At worst, GDP will shrink by 0.5 percent.
Even Germany, Europe's biggest economy, saw industrial orders slump 2.7 percent in January, dimming the outlook for its export sector, which is the backbone of its economy. And Japan has yet to recover from its earthquake a year ago. That leaves the United States, the world's biggest economy, as the primary engine for growth, putting a burden on the U.S. consumer.
SHOP OR DROP
Shopping might be an American pastime, and consumer spending accounts for about two-thirds of U.S. economic activity. But for many Americans, the time has not yet come to return to the malls and pull out the credit cards.
While the U.S. employment report last week showed new jobs were added over the past three months at the fastest pace in six years, unemployment is stalled at 8.3 percent and wages are nearly stagnant. Average hourly earnings are up 1.9 percent over the past year, adjusted for inflation they have shrunk. JPMorgan put the dilemma succinctly in a client note: "The hours are great but the pay's no good."
Rising prices add to the pain. Consumer price data to be released on Friday is expected to show U.S. inflation rose by 2.9 percent year over year in February, unchanged from January. Even excluding food and the sharp rise in gasoline prices, the CPI is seen up 2.2 percent, wiping out all the gains made in average pay.
A broader measure that takes into account retail and investment income tells a similar story about Americans losing ground once inflation and taxes are taken into account. "The trend has been flat to negative since the recession began. Without growth in incomes, consumer spending will be meager," said Geoff Hall, managing economist at IFR, a Thomson Reuters company.
The result is a reluctant consumer, something borne out by the patchy reports from American retailers. While stores that cater to affluent Americans have been reporting strong sales, those aimed at the country's great mass of middle- and lower-income customers are struggling.
U.S. retail sales for February, due on Tuesday, are expected to show a healthy 1.0 percent gain. But the numbers are notoriously volatile and were disappointingly weak over the holiday season. "If we saw the employment picture change, where people are more sure of getting and keeping jobs in the future, we should see consumption picking up with a lag," said Aparna Mathur, economist at the American Enterprise Institute.
PUTTING OFF THE PURCHASES
Deutsche Bank is reasonably confident U.S. consumers will revive later this year. U.S. economist Peter Hooper ticks off a number of reasons: a rising stock market, up 8.5 percent already this year, which supports household wealth; rising consumer confidence; and consumer credit growing again thanks to low interest rates.
Auto sales already are rising and, importantly, the debt burden measured against disposable income has plunged from record highs four years ago to 16 percent, the lowest level since the early 1990s, he said.
Add to that a strengthening jobs market and pent-up consumer demand for long-lasting goods such as cars and washing machines, and Americans could well open up their wallets again this year. "There was a puzzling absence of income growth and consumption late last year, and I suspect that is correcting," said Hooper.
These developments should prove encouraging to the Federal Reserve, which meets on Tuesday. It is expected to hold off on further bond purchases to stimulate the economy for now. But Fed Chairman Ben Bernanke has left no doubt he wants to see unemployment decline further before he is satisfied that recovery is secure.