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consumer spending, consumers, demographics, Employment Cost Index, health care, imports, manufacturing, medical equipment, National Institutes of Health, personal income, pharmaceuticals, recovery, retirement, savings, subsidies, Trade, Trade Deficits, wages, {What's Left of) Our Economy
Three new government reports have put the spotlight back on American consumers, and especially on whether they can quicken a U.S. recovery that continues to disappoint the conventional wisdom (though not me!). I’m no expert on consumer trends. But I do feel confident that whatever new vigor American shoppers start showing will provide only a limited growth boost – because so much of what they buy will continue to come from abroad. As a result, this spending will generate more production and job creation overseas than at home.
The three reports I’m talking about were:
(a) yesterday’s preliminary reading on first quarter gross domestic product, which showed the economy slogging along at a pathetic 0.25 percent real annual rate;
(b) today’s reading on first quarter employment costs, which showed a decent (at least by recent standards) gain in wages and salaries (numbers that aren’t adjusted for inflation); and
(c) today’s report on March consumer spending and incomes, which showed the former up and the latter flat month-to-month. That made for the first monthly fall in the personal savings rate since November.
These results all reinforce a picture of the economy that’s gained traction in recent months – of workers doing somewhat better after years of stagnant, at best, incomes, and in fact getting a nice filip from falling energy prices but remaining cautious shoppers nonetheless. As a result, most analysts foresee a solid increase in spending and therefore growth for the rest of the year, as Americans open their wallets wide again.
As ever, though, and especially in recent years, the fly in the lift-off ointment is imports, whose scale and robust growth has greatly weakened the longstanding relationship between what Americans consume and how fast the economy grows. For despite the endless talk of the United States being a “consumer-driven economy,” it’s production that fuels GDP growth, not shopping.
As I wrote yesterday, the trade shortfall has grown fast enough to take a big bite out of growth since the last recession ended, in the middle of 2009. But yet another news item today helps illustrate how the process works. It’s a Fiscal Times piece claiming that fully 20 percent of U.S. household spending now goes to health care services and medicines – up from six percent in 1960. According to another calculation, that works out to more than $8,000 for every man, woman, and child in the country.
Since most health care spending winds up on the services side, that’s actually good news as far as growth itself is concerned, since nearly all of these services are supplied domestically. Yet when it comes to health care products, it’s another story entirely – as can be demonstrated by looking at trade balances in these sectors.
In a phrase, they’ve worsened greatly since 2000. In fact, a $9.71 billion deficit more than quadrupled to $46.78 billion by the end of last year. Some health care-related products have excelled – e.g., surgical and medical equipment and laboratory instruments, which improved on smallish surpluses. But others, often thought to be among the nation’s technological and industrial crown jewels, have fallen flat on their faces – notably electro-medical equipment. At the beginning of the millennium, America ran a $1.21 billion trade surplus in devices like CAT-scan and MRI machines. But by 2014, this trade had turned into a $2.03 billion deficit. And the 800-pound gorilla in the health care manufacturing category is the pharmaceutical sector, which saw a $955 million trade shortfall balloon to $31.52 million during this period.
Even worse, demand for all these health care products is heavily subsidized by government. And the nation wouldn’t even boast a world-class pharmaceutical industry without the research and development performed by the federal government’s National Institutes of Health. So increasingly, Americans’ tax dollars are being used to create and expand markets for products supplied by foreign factories and workers, and in many cases to create products themselves whose manufacture is offshored by U.S.-owned firms.
To add insult to this injury, thanks to a combination of those government subsidies and an aging population (in many foreign countries, too), health care is among the most promising future manufacturing growth markets. If the vast majority of these products were made in America, the employment, wages, and output would stay in the United States, and fuel more growth that’s healthy. On top of a recovery that’s faster and more sustainable, the resulting health care manufacturing boom could take some of the expected economic and financial sting out of the nation’s looming demographic crisis.
But because of Washington’s indifference to where goods are produced, and widespread ignorance over what really fuels prosperity, much of this golden opportunity will be squandered, and health care will be yet another sector where America’s spending bucks keep generating less and less vital growth bang.
