With excess supply and weak demand plaguing the world economy, the United States has been the only market where many foreign producers could sell during the five-year business recovery. Long ago, it became clear that no small thing like the free fall of the dollar would induce U.S. trading partners to give up their shares of the U.S. market.
Only a slowdown in consumer spending would bring about substantive improvements in the imports picture. But that could also cause a recession in the United States that would rapidly spread abroad.
I predicted that it would probably take some kind of outside shock to precipitate such a spending slowdown. Consumers are overburdened with debt as they continue trying to finance life styles that they can no longer afford but don't want to give up. By the end of the third quarter of 1987, personal savings had fallen to a post-Korean low of 2.8% and consumer installment debt was up to 19% of disposable personal income, while growth in inflation-adjusted, or real, income had stagnated.
The stock market crash on Oct. 19 may have been that shock, causing consumers to pull in their horns and plunging the economy into a recession. Auto sales in the post-crash months and consumer spending after a lackluster Christmas season may be an important test in determining whether consumers have indeed cut back spending in response to the crash.
Retailers deeply discounted their wares in the final days before Christmas; by mid-December, car sales had fallen 18% compared to last year and probably would have been even lower if not for intensive sales incentives. Already, auto makers are planning production cuts in 1988 and the Commerce Department's leading indicators, due mostly but not entirely to the crash, slid 1.7% in November, the biggest drop in almost 3 1/2 years.
Nevertheless, the consensus is that there is no need to worry about a consumer retrenchment leading to a recession. Most observers believe that part of the U.S. consumer cutbacks will come out of imports, as opposed to U.S. products. The rest, they believe, will be matched by rising exports, as cost control and the weak dollar improve the international competitiveness of U.S. producers. In effect, they say improvements in the American trade balance will offset consumer weakness and allow the U.S. economy to putter along relatively unscathed.
Hooked on Imports
But there are several problems with the consensus view. True, less consumption spending will translate into a drop in imports. In past recessions, imports usually fell much more steeply than overall domestic spending, reflecting both what was then the limited impact of importers on consumer buying habits and efforts by domestic manufacturers to recapture market share. That decline, coupled with the continued growth of exports until the recession spread to other industrialized countries, usually some two quarters later, did cause the U.S. trade balance to improve appreciably.
However, in the past five years, U.S. consumers have become hooked on imports and many foreign companies have established a strong marketing and distributing presence in this country. Today, no videocassette recorders or compact disc players are made in the United States and the majority of color television sets are imported. Imports are thus not expected to decline much more than domestic goods production, limiting the extent to which consumer spending weakness comes at the expense of weaker imports.
But suppose that, even if this is true, the consensus is right and the weakness in domestic consumer spending is offset by big increases in exports, fueled by a weaker dollar and productivity gains from business restructuring. The question is, who will take more of our exports?
Not Canada or the economically healthiest newly industrialized countries (NICs) with large trade surpluses, such as South Korea, Taiwan and Hong Kong, all of which virtually peg their currencies to the U.S. dollar. Even if the NICs didn't do this, costs of production there are so low that they could always undercut the United States. In manufacturing, American unit labor costs are 10 times those of Korea and eight times those of Taiwan.
And not the debt-ridden Third World countries like Mexico and Brazil, already short of U.S. currency to repay loans. And not an indecisive OPEC, suffering from an oil glut that is likely to lead eventually to single-digit prices for a barrel of oil.