Shoppers are seen wearing masks while shopping at a Walmart store in North Brunswick, New Jersey, the United States, July 20, 2020.
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WASHINGTON, Aug 30 (Reuters Breakingviews) – The US consumer is coming to the rescue of the global economy. As early as 2009, companies turned to China to shore up a shattered world. Now that inflation has been high for decades in many countries, they are looking to the United States to do the heavy lifting. Covid-19 lockdowns and war are taking their toll, but spending has been resilient.
China’s role in alleviating the effects of the global financial crisis has been widely overestimated. Its 4 trillion yuan ($586 billion in current dollars) stimulus package offset the slump in foreign demand by investing money in infrastructure. The policy increased purchases of iron ore and other commodities from Australia and elsewhere, bottomed out Chinese revenue streams at companies like Starbucks (SBUX.O) and Volkswagen (VOWG_p.DE) (VOWG.DE) and depressed quarterly GDP through late 2009 rise to a staggering 11.9%. However, since most non-commodity demand was created within China’s borders, its impact on overseas job creation was limited.
In contrast, the United States is now stepping forward to provide some relief. Supported by government stimulus funds, US households have about $2.5 trillion in excess savings, according to the nonprofit research firm Brookings Institution. All that cash is partly why retail sales in July rose an unexpected 0.6% mom in inflation-adjusted terms, according to Commerce Department data released earlier this month.
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The strong dollar, which hit a 20-year high against a basket of currencies in July, is also helping. Imports from China increased by 20% in the first six months of 2022 compared to the same period last year, while they also increased by 12% from Europe. There has been some slowdown as supply chain bottlenecks are resolved and lower-income Americans feel the rising prices, impacting sales at retailers like Walmart (WMT.N).
However, top earners continue to grease the economic wheels. For example, revenue of LVMH (LVMH.PA), owner of Tiffany and Christian Dior, rose 21% in the first half of this year, although sales in Asia ex-Japan were basically flat due to pandemic movement restrictions in China. Sales growth of 24% in the United States has increased the country’s overall sales share to 27%. This summer, a $299 Halloween skeleton made in China at Home Depot (HD.N) quickly sold out.
Americans, less affected by the war in Ukraine than Europeans, are also spending abroad. Travel insurance company Allianz Partners estimated US vacation trips to Europe would increase by 600% this summer. And they’re spending more too, increasing their travel budget by an average of $440 to $2,760, compared to less than $1,800 that Europeans spend, according to an Ipsos survey. The boost will help the sector nearly regain its 10% contribution to pre-pandemic global GDP, which the World Travel and Tourism Council says nearly halved in 2020.
US spending could continue for a while. JPMorgan (JPM.N) Chief Executive Officer Jamie Dimon said in June that Americans had up to nine months of purchasing power left. Bank of America (BAC.N) chief Brian Moynihan was more optimistic. He told CNBC in July that even middle-income earners who had about $3,500 in their bank accounts prior to the pandemic have about $13,000 to cover pent-up shopping needs and are in good financial shape.
So far this year, China’s contribution has been mostly negative. Private consumption as a share of GDP is now expected to fall to 37% by the end of the year, compared to 68% in the United States. The record high trade surplus underscores weak domestic demand.
Foreign companies feel the pain. Starbucks grew comparable store sales in North America by 9% but shrank 44% in China in the quarter ended July 3. Ford Motor (FN) Quarterly Sales Volume In China Down 38% From End-2021; European automaker Stellantis (STLA.MI) has thrown in the towel and ended its joint venture in the country. One of the few bright spots is that the world’s second largest economy is not fueling commodity price inflation thanks to a declining real estate sector.
For some companies, the economic strain in China was just an outlier. Although Airbnb (ABNB.O) ceased operations there and all mainland listings ceased in July, the online accommodation market expects record third-quarter sales of nearly $3 billion. Like many others, it has American consumers to thank.
Could be worse: US retail sales and employment weather recession The world’s dependence on American consumers has increased
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CONTEXT NEWS
US retail sales rose 0.6% mom in July, adjusted for inflation, according to Commerce Department data released on Aug. 17. The drop in gasoline prices led to a 0.5% drop in the cost of goods, giving consumers more money to spend on groceries at grocery stores and restaurants.
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columns by Gina Chon in Washington and Pete Sweeney in Hong Kong; Edited by Jeffrey Goldfarb and Sharon Lam
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Peter Sweeney
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