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IN HIS BOOK "ONE WORLD, READY OR NOT," THE JOURNALIST William Greider coined a useful phrase to describe America's role in the global economy. The United States is, he said, "the buyer of last resort." When other countries' economies do poorly, the United States absorbs their exports and promotes overall stability. Rarely since World War II has this role been so important, with most of Asia depressed and other countries weakening. But this time the U.S. economy may be unable to spend the world back to prosperity--and the rest of the world could pull America into a slump.
We are now enjoying, of course, a stupendous consumer-spending spree, which seems to bode well. Americans are buying computers, cars and sofas from almost everywhere. The trouble is that the buying binge won't continue forever, and the falling stock market (as of Aug. 14, the Dow Jones industrial average was almost 10 percent below its peak) could hasten the end by puncturing consumer confidence. Asia's distress might then spread, as a glut of sellers--foreign and domestic firms--meets a dearth of buyers.
I remember exactly when I spotted the spending spree. It was early Feb. 14 at Hancock Airport in Syracuse, N.Y. I had a 7 a.m. flight and expected to find the place deserted. Instead, it was packed. People were rushing off to such garden spots as Buffalo, Baltimore and Pittsburgh. Granted, this was Presidents' Day weekend, and some flights had connections to Florida. Still, the travel mania was astonishing. In 1998 the nation's airlines will carry about 600 million passengers, up almost 25 percent since 1993.
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Here's another sign of ebullience: sport utility vehicles. In 1993 Americans bought 1.4 million of them; by 1997 that figure was 2.4 million--one of every six new vehicles sold. Compared with typical cars, SUVs are pricey, and the mix is moving upscale to larger models with more leather seats and CD players. Many SUVs are now sold to families "with more than one vehicle per licensed driver," notes Joel Pitcoff, a sales analyst with Ford. Some people buy vehicles like clothes: one for every occasion.
The problem is that to pay for all this spending, American consumers have almost stopped saving. The Commerce Department defines personal saving as people's after-tax income minus their consumption. Between April and June, Americans spent 99.4 percent of their current incomes; they saved 0.6 percent. That's less than one tenth the average between 1980 and 1992 (6.7 percent of income). As the stock market has risen, the savings rate has dropped. It went from 5.7 percent in 1992 to 2.1 percent in 1997.
We seem to have a paradox: people save less but invest more in the market. Between 1989 and 1995, the share of families owning stock rose from 32 to 41 percent, reports the Federal Reserve. It's surely higher now. Charles Schwab Corp., the broker, has 50 percent more accounts than in 1995. But the paradox is more apparent than real. People may think they haven't cut saving; they make the same monthly contribution to a retirement account. But there are many ways to reduce saving: borrow more; sell stocks and spend the proceeds, and dip into other accounts.
All these things are probably occurring. Borrowing has increased, and despite falling interest rates, consumers are now paying a record 14.8 percent of their after-tax incomes in interest and principal repayments, estimates Susan Sterne of Economic Analysis Associates in Greenwich, Conn. To Sterne, the high borrowing and low saving are ominous; they usually characterize a business cycle near its peak.
The economy is vulnerable to anything that shakes confidence and causes consumers to raise their precautionary saving. Writes economist Ira Kaminow of the Capital Insights Group: "The economy is enjoying a number of virtuous cycles that could turn vicious if the stock market were to enter a sustained contraction or even level off. (1) The market is supporting strong consumer and investment spending which in turn supports profits and the bull market. (2) The strong market is helping to keep tax revenues and budget surpluses high which help keep interest rates low and further support stocks. (3) Inventory spending is based on expectations of further strong final demand . . . "
Well said. A market slump could trigger a downward spiral of consumer spending and stock prices. Few economists yet predict a recession, but forecasts of continued growth rest on optimistic--perhaps heroic--assumptions. Merrill Lynch projects that the economy's output (gross domestic product) will expand 3.3 percent in 1998 and 2.4 percent in 1999. To achieve that, the consumer savings rate remains below 1 percent, and business investment jumps a hefty 20 percent between 1997 and 1999, even though corporate profits fall slightly.
It could happen. There's still ample optimism in America. People put their homes on the market one week; they're sold the next. The National Association of Realtors surveys median sales prices of existing homes in 132 metropolitan areas. Over the past year, they've risen in 123. They were up 9 percent in Denver and 11 percent in Detroit. But optimism could prove overblown. One reason corporate profits may drop is the widening trade deficit. Merrill Lynch estimates the deterioration at about 2 percent of GDP between 1997 and 1999, mainly because U.S. companies export less to Asia and--as a result of currency depreciations--import more.
This brings us back to the "buyer of last resort." The rising trade deficit is America's contribution to a global economic recovery. But if the trade deficit grows too fast, it could cause a U.S. recession by undermining job and investment growth. That would be dangerous, because a booming America is the world economy's last prop. (Europe is also growing, but it exports more to the world than it imports.) Even without a slump, the U.S. economy is not large enough--about a fifth of the global total--to rescue the entire world singlehandedly. In his book, Greider wonders what happens when the United States can no longer "lubricate the global marketplace." We may soon learn the answer.
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