Totally Growth’d Out

With the American economy (gross domestic product) contracting at an annual rate of 6.1% according to our first quarter reports from the Department of Commerce, and Europe tracking an annualized GDP contraction of 10% according to the European Union’s statistical bureau, Eurostat, it seems that the big missing ingredient from the “greater economic plan” is consumers.

The U.S. depends on consumer-level activity for 70% of its economic activity, and while bear markets gyrate and commodities brokers bet against the dollar, the basic underpinning of any reversal in economic flow, consumer spending, is still falling, along with employment numbers. Western consumers (at least the ones who are still working) seem to be increasing their savings rates and “postponing what you may want to buy today to sometime in the distant future.” We’re beginning to sound more Asian than Asia.

It hasn’t been this bad since The Great Depression. But as I’ve pointed out before, the “great economic driver” – China – is also the great provider of rapidly accelerating consumer buying power. Strange that this fearsome net exporter of gigantic proportions, this accumulator of global resources and buyer of global technology, is also the most like supplier of at least the first significant reversal in consumer demand. More importantly, despite claims that American companies can never survive and prosper in a xenophobic market that only protects itself, the numbers strongly suggest otherwise.

The May 14^th Wall Street Journal stated that while financial giant Citigroup’s failures in the United States – based on the stress test analysis – mandated $10 billion of additional capital, her China operations did very well, noting that Citi’s “net income in China jumped 95 percent in 2008 to the equivalent of $191 million, helped by a 20 percent rise in commercial foreign-exchange transactions.”

Newsweek’s Daniel Gross, in a May 14^th article entitled Kentucky Fried China, provides a litany of American success in the Peoples Republic:

1. “Wal-Mart, for example, had 246 stores in China as of March 31, serving just 7 million Chinese customers weekly…”

2. “In April, GM sold 173,007 vehicles in the U.S., down 34 percent from April 2008. The same month, GM's China sales jumped 25 percent to a record 151,084.”

3. “YUM Brands, the parent of Pizza Hut, KFC, Taco Bell and Long John Silver's. Last year, YUM's restaurant count in the U.S. was basically unchanged. But its China unit, which comprises mainland China, Thailand and KFC Taiwan, opened 500 new restaurants and tallied operating profits of $469 million. With 2,980 restaurants and a new outlet opening almost every day, Yum Brands says KFC is the ‘largest and fastest growing restaurant chain in mainland China today.’”

Our exports to China are still relatively meager compared to China’s exports to us: we only hit $5.5 billion in March, but the first quarter of 2009 showed a 25% increase in American sales there. As China transitions from a nation of savers and exporters into an economy of consumers (in 2007 they saved 50% of their income), in significant part to make up for the decline in their exports (down 22.6% in April, and her sales to the U.S. measured from the first quarter of 2008 to the first quarter of 2009 were down 10.8%), that pent-up buying potential represents a ray of hope … salvation if you will… to Western nations mired in economic muck.

Hard to picture the great isolated China of the 1960s and 70s, the sworn enemy of the United States, now being one of the most critical ingredients to our survival and future economic growth. The symbiotic relationship, which will most definitely have its ups and downs, is the cornerstone of global economic recovery. Who woulda thunk?

I’m Peter Dekom, and I approve this message.