US savings Aug10.pngConsumer spending is 70% of US GDP. And because US GDP is so large, this means the US consumer is 17% of global GDP. This is the same as the combined GDP of China and Japan, who rank 2 and 3 after the USA.
So a change in US consumer spending matters. And it particularly matters to the chemical industry, as our products are focused on consumer needs. Thus the blog is taking very seriously indeed comments from major US consumer companies, who suggest we can no longer rely on the “shop-till-you-drop American consumer” to support global demand. For example:
Wal-Mart, the world’s leading retailer, has seen its US same store sales drop for the last 5 quarters. This has not happened before. Wal-Mart also warned they expect consumers to “remain cautious about spending“.
Target, the leading discount store, confirmed the blog’s view that March was the peak of the cycle, with CEO Gregg Steinhafel saying “its clear Q2 marked a change in trend. GDP growth softened considerably, and our sales trends levelled off as well“.
Procter & Gamble, the world’s largest consumer products company, gave the same message. “Consumers day-to-day spending reflects an entrenched frugality that often means leaving P&G’s relatively inexpensive products on the shelf.”
This is serious stuff. And it links with major demographic changes taking place in the USA. The boom in chemical demand over the past 40 years is closely tied to demand from the ‘baby boomer” generation (born between 1946 – 1964). They now own 80% of all US personal financial assets and are responsible for over 50% of discretionary spending power.
But they are getting closer to retirement, with a median age of 54 years. And so their need for ‘new things’ is reducing, as is their ability to afford them. Equally, as the above chart from shows, their savings rate is starting to shoot up. They were let down by the stock market after the dot-com boom; then the housing market disappointed.
So now we seem to be seeing the start of a generational switch from spending to saving in the world’s most important market. From close to zero, the savings rate has already jumped to 6%, as baby-boomers worry about how to afford their retirement, especially as they can expect to live longer than any generation in history.
Of course, if stock market and housing prices began to recover, then this trend might reverse again. But there is clearly a danger of a vicious circle developing, where fear replaces greed as the prime driver in financial markets, and drives a growing demand for yield.
The back-to-school season, now underway in the USA, is the second most important shopping period of the year. It will therefore be even more critical than usual for those wishing to forecast chemical demand.
If Wal-Mart, Target and P&G are right, then the US economy could easily see US GDP growth of below 2% in Q4.
This would not be good news for everyone in the chemical industry, dependent on the US consumer to drive future demand.