The Bottom Line - Foundation Bank

The US Consumer is spending less money. According to the US Bureau of Economic Analysis, the personal savings rate has averaged 4% this year. This is the highest it has been since 1999. The savings rate was a measly 2% or less for the bulk of this decade. That was made possible by willing lenders who enabled the consumer to borrow more than he was making. But that has changed. Lenders have tightened the reigns, and the credit that was available even two years ago is not available today. So, the US consumer is making some much-needed adjustments. If this is the case, and if the US Consumer is not going to be the powerhouse that he once was, where is our hope for a growing global economy? China, India and Brazil. Although the US consumer has (at the very least) slowed his spending, the emerging middle classes of these three countries are more than able to take up the slack. Every month millions of new people across the globe are benefiting from their nation’s economy, and looking to spend their earnings on goods around the world. The International Monetary Fund forecasts a 9% GDP in China, 6.4% in India and 3.5% in Brazil for 2010. The US is expected to grow at only 1.5% that year. So even though the US Consumer has driven the world’s economy over the last 30 years, it may be the Asian or South American consumer that keeps it moving for the next 30. It’s no coincidence that Brazil will host the world cup on 2014 and the Olympics in 2016. It’s a sign of the times when South America is hosting its first Olympic games in history.

The bottom line is that the rest of the world it catching up. But this should not be a cause for discouragement. On the contrary, the developing countries are going to be hungry for US goods and services. As a matter of fact, China is narrowing their trade deficit and may soon import more than they export. That means they will be buying more goods and services from other countries than they are selling. If the dollar continues to be weak, that makes our goods and services even more attractive in China and elsewhere. Currently China cannot produce enough to cover what their country consumes. India is also a future market for US goods and services. India’s new Prime Minister visits Washington on November 24 to talk about open its doors wider to US Exports.

Don’t read into the third quarter GDP number of 3.5% that was reported on Thursday. It is good news, but not great news. Government stimulus money has fueled much of the growth, particularly in the auto and housing industries. The real test will be how well the economy performs as the stimulus is removed. Is it healthy enough to stand without the subsidies and dollars present today? It does not appear that the government is ready to begin that weaning process yet, seeing that a plan is in the works to extend the $8000 first time homebuyers credit beyond November 30^th into April of next year. This plan also includes an expansion of the credit to include existing homeowners who buy after being in their current residence for at least 5 years. That credit would be $6500. So, it appears that government spending will continue to be the soup de jour. The challenge before our policy makers is when to bring the patient off the economic drugs. Not only that, but keeping the economy from suffering from withdrawal in the process.