A Dearth of Demand?

No bull market is free of concerns. (Indeed, this is why bull markets are said to climb a “wall of worry.”) This time is no different, and some common concerns—like stubbornly high unemployment, the eurozone’s various woes, widely perceived too-slow global economic growth, etc.—have many headlines seeking to explain why they linger. Maybe it’s cagey consumers who aren’t spending enough to revive economic growth. Or relatedly, maybe it’s too-high unemployment that’s holding back consumer spending. Maybe it’s obstinate national governments either enforcing too-strict austerity measures or refusing (for one reason or another) to inject additional economic stimulus.

The common thread? All are based on a fundamental assumption the prime economic mover and shaker is the consumer. The idea that the consumer is the alpha and omega of economic growth is incredibly widespread—yet deceptively counterintuitive. Consider the following:

Euro Debt Crisis: Is Complete Pessimism Justified?

We quote: “But even advocates of this view concede that there is also currently a strong element of weakened demand. Many economists, myself included, suspect that this is just about the whole story.” (Italics added) In other words, the supposition is the entirety of the eurozone’s economic woes is a problem of too-little demand and too-weak consumers.

Or this: Consumers Unlikely to Rekindle the Recovery

But recall US consumer spending is at an all-time high. Furthermore, we’d be hard-pressed to find an economic recovery that was truly “consumer-driven” as described here. As we’ve arguedbefore, employment recovery has always lagged economic recovery. Always. And that’s because overall and on average, the primary driver of economic growth is, in our view, the economy’s supply side. Growth generally comes from businesses investing funds in production, research and development and, ultimately, employment. As businesses are successful and earn profits, they’re able to expand, ultimately necessitating hiring more folks—leading, in turn, to employment recovery. But none of that can happen without first businesses producing goods folks are willing to consume.

This may sound like not much more than a chicken-and-egg argument that can’t be reliably parsed. But consider the number of goods we have today beyond unimaginable to prior generations—things like cars, computers, refrigerators, microwaves, etc. It’s not as though a consumer woke up one day, headed for the local General Store and demanded the proprietor sell him a contraption to automatically chill his perishable food and freeze his longer-term provisions. (The proprietor would’ve looked at him like he had two unrefrigerated heads.) No—we as consumers didn’t (and couldn’t) realize we “needed” a refrigerator (steel plow, car, smart phone) until one was invented.

None of this is to diminish the very important role consumers do play—after all, their contribution is counted heavily in typical GDP calculations. In fact, consumers are typically credited with some 70% of GDP—possibly tempting some to quickly assign economic doldrums to a dearth of consumer spending. But, if you look historically at that share, it’s incredibly stable. Often during recessions, consumer spending doesn’t fall much if at all. It’s the business side that’s more variable.

Instead of pondering whether consumers are DOA, we’d encourage folks to instead consider (not just today, but always) what impediments might be hindering the economy’s supply side. What might be preventing producers from supplying goods consumers would want to buy to the market? Maybe onerous regulations are in the way. Maybe taxes are disincentivizing production for one reason or another. Maybe regulations are incentivizing spending on compliance efforts and redirecting funds otherwise (and more productively) spent on innovation or production. Or or or.

By and large, the economy’s proven amply capable, with a bit of time and patience, of ultimately resolving its imbalances. After all, we’ve yet to experience an economic downturn—recession or worse—from which we’ve failed to recover. The chances that turns out terribly different this time are—rounded to the nearest whole number—zero.