The Comeback American Consumer?

Here's some good news for the United States and the rest of the world: the American consumer may not be dead after all.

Conventional wisdom holds that typical U.S. shoppers are so traumatized by high debt and rising unemployment that their spending will remain subdued for years. That means, the reasoning goes, that the world's largest economy will be mostly a follower in any global recovery. With consumer spending representing about 70 percent of gross domestic product, lackluster buying will hobble the U.S. expansion and provide little benefit for America's trading partners.

Don't believe it, says economist Susan Sterne of Economic Analysis Associates. Consumer buying is already propelling the U.S. recovery and will continue to do so in 2010, she says. Among other things, she expects car and light truck sales to rebound to 14.4 million units next year, up from 10.6 million in 2009, and housing starts nearly to double, from 585,000 in 2009 to 1.038 million in 2010. Total consumer spending should increase 4.8 percent in 2010, compared with a decline of 0.5 percent in 2009 (corrected for inflation, the figures are 3.1 percent for 2010 and a drop of 0.5 percent this year.) That should help foreign exporters of everything from PCs to cars to exotic cheeses.

Sterne dismisses the view that the recent strength in consumer spending mostly reflected the "Cash for Clunkers" program. She also says that the adverse effects of heavy debt loads and high joblessness have been exaggerated. Debt burdens have actually declined dramatically, she reports. Monthly interest and principal payments paid by average households peaked at 15.8 percent of disposable income in August of 2007; now they're only 13.5 percent, which is typical of low points during recession. Americans have paid debts or defaulted on them, and interest rates have dropped. Both have contributed to lower debt burdens. Meanwhile, the recovery in stock prices and, to a lesser extent, real-estate values has stabilized households' net worth (assets minus liabilities). By her estimates, U.S. household net worth will rise 3.7 percent this year and 6.9 percent next year; by contrast, there was a 17.2 percent drop in 2008. That, too, bolsters confidence.

To be sure, joblessness of 9.8 percent remains horrific and will stay that way for a lengthy period. She forecasts it will average 9.6 percent next year. But what such figures overlook, she says, is that the rate of job loss has declined dramatically, and employment growth─though modest─is set to resume. In the first quarter of 2009, payroll jobs dropped at a steep 5.9 percent annual rate. But by early next year, she thinks payroll jobs will be growing at about a one percent rate. These developments stabilize consumer confidence. "People have a tendency to look backwards," she says. "They're not looking at what's happening now."

One indicator, Sterne notes, that consumer spending rests on a sturdy foundation is the rise of the stock prices of major retailers. "They've been going up for nine months," she says. Sure enough, many retail stocks are well off recent lows. Macy's is up from a low of $5.07 to about $20; JCPenney's, from $13.71 to about $37; and Saks from $1.50 to about $7.45. Americans will be saving more, Sterne says, but the increase will be gradual and won't disrupt a recovery in spending. One caveat to Sterne's forecast: though optimistic about a short-term revival, she says that the aging of the population will ultimately mean slower spending because older Americans have passed their peak earning and buying years. But for the world economy, that dark cloud is still on the horizon.