Worry Not for the U.S. Consumer

The consumer is not nearly as desperate as you may think.That’s the view of James Glassman, senior policy strategist for JPMorgan Chase & Company. If he’s right, it’s a huge vote of confidence in the American economy.Mr. Glassman, who easily unravels economic mysteries, claims that Americans manage their affairs quite rationally. His premise is that the American consumer has taken on added debt only when declining interest rates mean that the cost of carrying that debt remains within his budget.As a result, he reckons that the mounting figures for consumer debt do not foretell an eventual collapse in spending. This is crucial, since a consumer slowdown is widely viewed as the most likely threat to world growth.It has become almost an article of faith, especially among alarmist economists like Paul Krugman, that the American consumer is spoiled, shiftless, hooked on luxury goods beyond his reach, and hopelessly mired in debt.Mr. Glassman begs to differ. His supporting evidence is that debt service as a percentage of income has remained remarkably constant over the years.As inflation peaked and then dropped beginning in 1980, interest rates inevitably followed. Though outstanding debt has nearly doubled as a percentage of GDP, homeowners’ debt service has only climbed from about 14% to around 16% of income. Mr. Glassman puts this in the “manageable” category, and concludes that the consumer is not restrained by this slight bump up in carrying costs.What about the abysmal savings rate? Mr. Glassman has an answer for that one, too. He maintains that it is not what Americans put away each month that matters, but rather how they view their net worth.The ratio of net worth to income has climbed from a low of about 4.5 in the mid-1970s to around 5.5 today, even as the savings rate has fallen to almost zero.Mr. Glassman maintains that the consumer is more concerned with the value of his portfolio and of his home than with the amount of money he is saving each week. With the exception of the late 1990s, household net worth is at a record high.Further, Mr. Glassman is optimistic that a continued broadening of the recovery will support increased hiring. Record corporate profits will lead companies to relax hiring freezes and job numbers should grow.In short, if inflation and interest rates remain low, the American consumer should continue to lead worldwide economic expansion. For this reason, and for others, Mr. Glassman is relatively sanguine about the world economic picture.In his view, globalization is indeed at work in the world, and it is an unrelentingly positive force.The free movement of goods is driving prices down, keeping inflation at bay.There is no mystery as to why U.S.long rates have remained low. As he so simply puts it, “If investors believe that the Fed is intent in keeping inflation under control, and that it will succeed, then long rates are exactly where they should be.”What about oil prices? That, surely, is a concern. To Mr. Glassman, the recycling of petrodollars is an offsetting factor. Companies that explore for and produce oil also pay workers, and pay dividends, softening the blow to the economy. Foreign producers recycle monies back into American capital markets, increasing liquidity and helping keep rates low.What can go wrong with Mr. Glassman’s sunny view of economic trends? Higher inflation, brought on by trade wars aimed at crimping the opening up of global trade.He thinks that politicians are aware, despite the outcry over “outsourcing,” that the freer international exchange of goods is on balance a positive for American consumers and businesses. As he points out, few American businesses are screaming for protection against Chinese competitors. Most recognize the opportunity to import the advantages available from a lower-cost workforce.Overall, Mr. Glassman is positive on the economy and the retail sector, his area of focus at JP Morgan. “The U.S. worker has a lot of recovery ahead. As good as income has been, it’s going to get better.”So much for the dismal science.

Worry Not for the U.S. Consumer

Worry Not for the U.S. Consumer

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