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Consumer Retreat Forcing Nations To Refocus Economies

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The Boston Globe

The Tampa Tribune

Published: March 24, 2009

The era of the consumer-driven economy may be over.

After powering U.S. and global growth for more than a generation, the American consumer has run out of gas. Burdened by debt and no longer able to borrow against rising home and stock values, U.S. households have begun a retreat in spending that will require the nation and the world to find new economic drivers, economists say.

In the short term, government will play an expanded role, increasing spending to fill the gap left by shrinking consumer demand. But over the long term, the nation will need to make fundamental changes by borrowing and consuming less, while saving, producing and exporting more.

"We are going to need fewer malls and more factories," said Edward Leamer, director of the UCLA Anderson Forecast, an economic research group at the University of California at Los Angeles.

The transition for the U.S. and global economies won't be painless either, economists said. Consumer spending, which accounted for as little as 62 percent of the nation's economic activity in the early 1980s, peaked in mid-2008 at about 71 percent, the highest share since the 1930s, according to the Commerce Department. It has since slipped to 70.5 percent.

The pullback has pushed U.S. automakers to the brink of bankruptcy, and major retailers into liquidation. The trade group International Council of Shopping Centers estimates 73,000 stores will close in the first half of 2009, after 148,000 stores shut their doors in 2008.

Economists say it's going to take at least a decade for this country and the world, particularly countries that export to U.S. markets, to wean themselves from a quarter-century of ever-increasing spending by American consumers.

In Japan, for example, the economy shrank at a 12.7 percent annual rate in the fourth quarter of last year, more than double the U.S. economy's 6.2 percent rate of contraction. Germany's economy, also driven by exports, shrank at an 8.2 percent annual rate.

Mark Zandi, chief economist at Moody's Economy .com, said U.S. consumer spending will continue to fall over the next several years to at least 65 percent of economic activity, the postwar average. Such a decline would be equivalent to a loss of nearly $1 trillion in economic activity.

"Instead of U.S. consumers leading the way, they're going to be just holding their own," Zandi said.

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