The precarious position of the US consumer (page 1 of 3)

However, I seriously question the use of retail sales in the US as a measure of economic strength, for two principal reasons.

In my opinion, retail sales that are not accompanied by a rise in industrial production are highly questionable as an indicator for the domestic economy. They are a far better indicator for the strength of the Chinese economy, because rising US retail sales are leading to a widening of the US trade deficit with China, which is increasingly supplying the US market with consumer goods.

Consider the following. The US housing industry is booming. However, US production of appliances is flat to moderately down compared to a year ago. Or take the home furnishings industry, which should be a prime beneficiary of strong home-building activity. However, furniture imports into the US have jumped 71% since 1999 and now comprise between 40% and 50% of all sales.

According to an economist who has studied how US industries have been affected by rising imports, half a million workers lost their jobs in the furniture industry between 1979 and 1999. This is in stark contrast to China, which has become one of the world's largest manufacturers and exporters of furniture, claiming 10% of the global market share. In the first seven months of this year, furniture exports - principally to the USA - rose 35% to more than $3 billion.

Perhaps Fed governor Ben S. Bernanke should consider this point when advocating an ultra-easy monetary policy. He recently pronounced before the National Economists' Club in Washington that: the US government has a technology, called a printing press that allows it to produce as many US dollars as it wishes at essentially no cost.

By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

As I have just shown, the government can generate temporarily higher 'spending' though not necessarily higher production in the US, but overseas! If we look at the increase in US retail sales over the last three years and compare it to the increase in the US trade deficit, we note that practically all additional retail sales originated from the import of additional overseas products.

Therefore, Mr. Bernanke's US printing press seems to have an extremely limited effect in stimulating domestic economic activity, while being very effective in stimulating foreign direct investments and industrial production in China and, increasingly, Vietnam. I hope that the leaders of the Asian exporting countries appreciate this fact and sent Mr. Bernanke a large Christmas card - naturally, one made in China.

A similar situation to the US furniture industry is evident in its auto industry. While overall car sales are robust (although down from the torrid sales pace in July and August), sales of the three domestic producers are currently lower than they were in the 1990 recession, while sales of imported cars and light trucks are at a record. (Ford announced recently that it will boost its purchases of auto parts in China to as much as $1 billion annually starting in mid-2003.)

In fact, while the goods-producing sector lost 332,000 jobs in the last eight months, the service-producing sector has added 506,000 jobs over the same period. (Mortgage brokers were up 47,000, health services employment was up 178,000, education up 92,000, and government up 158,000.) In the meantime, the number of manufacturing jobs is back to the 1961 level.