Tuesday, January 27, 2009

Buyers Beware

The consumer confidence report, which measures economic sentiment among consumers, came out today; another gloomy economic figure to add to our collection. It edged downward another point to 37.7, from 38.6 in December, its lowest figure since 1967. As Americans look to find their footing, sentiment couldn't be more pessimistic.

In recent months consumers have cut spending dramatically, which in itself doesn't see like such a bad thing. People are trying to save more. Coupons are trendy. Goodwill anyone?

Remember, GDP = C + I + G + (X-M)

C= consumer spending
I = net investment
G= government spending
X-M = net exports

In an economic downturn, we leave ourselves particularly vulnerable to negative GDP growth, since consumer spending makes up more than 2/3 of our economic activity. An earlier blogger quoted that "the American economy is basically a giant ponzi scheme." We simply buy, buy, buy, import DVDs and flat screens from Asia, where they have been more than willing to finance our binge shopping with treasuries (though this can't continue indefinately). We've had import fever.

Well, the keg has run dry and the party is over. Our lack of spending is having a chain reaction felt around the world. Thousands of plants in China are closing daily, American companies aren't filling their orders; American consumers aren't buying. What is the answer? Replace America with another frivoulous and free-spending country who buys first and thinks later. In this environment, who are the potential candidates?

No one is more capable than us at being the buyer of the world.

In the future, hopefully we can change the composition of our GDP. We need to find a solution to making globally competitive products/services using our expensive workforce. I know it is comical, but what if we actually exported more products than we imported? We are on the first wave of innovation, so anything is possible, right? I hope so.

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