Last Week's Highlights

The recovery to date has been a twice told tale. On the demand side, inventory is being restocked. The ordering rate has been relatively positive. Output gains have been robust. Price hikes have been quite muted. Only the price story is the same on the demand side. True car-buying incentives propped up retail sales in March, but income was flat and consumer confidence remains weak. Obviously, either the demand side gains some spark or the fire will go out of the supply side. The story of the economy this spring and early summer will be centered on that spark.

THE SITUATION ABROAD

Economic conditions in Europe are a mirror in some sense of the domestic economy: Relatively strong supply conditions but weak recovery on the demand side. Asia/Pacific is doing better in terms of strength in demand. That's true not just in China but in India, Korea, even Australia. Debt, exchange rate changes, price trends for food and raw materials all have the potential to change this picture. There is a chance the picture will look much the same in a month or two as it does now.

FACT OF THE WEEK

Seventy one percent. Consumption accounted for 71 percent of GDP in 2009 and will probably be at this pace this year as well. Back in the early 1960's, the share was about 62 percent. A decade later, it crept up to about 65 percent and consumer debt-to-income ratios were edging higher as well. As late as 1991, it was still about 65 percent but edged closer to 70 percent in the 'Goldilocks' economy of the late 1990's, and the saving rate actually went negative. Today, the share is still high, as is consumer indebtedness. But the saving rate has edged up and is unlikely to reverse over the next few years. Clearly, these numbers reflect how slowly fundamental behavior changes. This is important because it seems like behavior is now changing in very fundamental ways.

QUESTION OF THE WEEK

If the American consumer is turning into a bit more of a saver, where is growth going to be coming from in the next decade?

While some analysts debate how much will consumers be saving (3 percent of income? 5 percent? More?), a separate question is whether this is permanent. Of course, there is a chance that consumers could quickly revert to old habits and the saving rate could drop back closer to zero. Most analysts think that is unlikely. And if that is the case, indeed the question is whether investment and trade growth can make up for slower consumers — as households save a little more of their income. And overtime, the money put aside in saving or investment accounts provides a pool of funds which businesses, large and small, might use to create new products and services, and thereby generate new jobs. This will occur only if new behavior patterns are accompanied by new ideas. Innovation, not new behavior, is the key.