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Are our shopping days over?

Consumer cutbacks could be a sign of profound shift in how economy operates

By Robert Gavin
Globe Staff / March 22, 2009
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The era of the consumer-driven economy may be over.

After powering US and global growth for more than a generation, the American consumer has run out of gas. Burdened by debt and no longer able to borrow against rising home and stock values, US households have begun a long-term retreat in spending that will require the nation and the world to find different economic drivers, economists said.

In the short term at least, government will play an expanded role in the economy, increasing spending to fill the gap left by shrinking consumer demand, economists said. But over the long term, the nation will need to make fundamental changes by borrowing and consuming less, while saving, producing, and exporting more.

"We are going to need fewer malls and more factories," said Edward Leamer, director of the UCLA Anderson Forecast, an economic research group at the University of California at Los Angeles, "and it's going to be a long adjustment."

The adjustment is already underway. Gorrill-Palmer Consulting Engineers Inc. of Gray, Maine, is an example. As recently as 18 months ago, the civil engineering firm earned more than half its revenues by designing sites, roads, and traffic improve ments for so-called big box stores, said company president Tom Gorrill. When retail projects started to dry up, the company shifted its focus from private development to public works. Today, Gorrill-Palmer depends almost exclusively on government jobs, such as bridges and sewers.

The transition, however, wasn't painless. Gorrill-Palmer cut 10 jobs, about one-third of its staff. "If we hadn't done what we did, we'd be really hurting now," Gorrill said.

The transition for the US and global economies won't be painless either, economists said. Consumer spending, which accounted for as little as 62 percent of the nation's economic activity in the early 1980s, peaked in mid-2008 at about 71 percent, the highest share since the 1930s, according to the Commerce Department. It has since slipped to 70.5 percent.

The pullback has pushed US automakers to the brink of bankruptcy, and major retailers such as electronics chain Circuit City into liquidation. The trade group International Council of Shopping Centers estimates 73,000 stores will close in the first half of 2009, after 148,000 stores shut their doors in all of 2008.

Economists say it's going to take at least a decade for this country and the world, particularly countries that export to US markets, to wean themselves from a quarter-century of ever-increasing spending by American consumers. In Japan, for example, the economy shrank at a 12.7 percent annual rate in the fourth quarter of last year, more than double the US economy's 6.2 percent rate of contraction. Germany's economy, also driven by exports, shrank at an 8.2 percent annual rate.

Mark Zandi, chief economist at Moody's Economy.com, said US consumer spending will continue to fall over the next several years to at least 65 percent of economic activity, the postwar average. Such a decline would be equivalent to a loss of nearly $1 trillion in economic activity.

"Instead of US consumers leading the way, they're going to be just holding their own," Zandi said. "The world is going to feel a lot different over the next 10 years than it did in the past 25."

It already feels different for Nypro Inc., a Clinton plastics maker. Nypro, a privately held contract manufacturer with plants in 16 countries, grew quickly in recent years as it made casings and components for consumer electronics such as computers and cellphones. Now, with demand for those devices sliding, the company is accelerating a shift to healthcare products, such as inhalers for asthma medicine and devices to deliver insulin to diabetics.

Nypro aims to boost healthcare's share of company revenue to as much as 40 percent over the next two to three years from less than 30 percent now, while reducing dependence on consumer electronics to less than half of all revenues from about 55 percent. In China, the company has added facilities for manufacturing healthcare products in each of its four plants there, once devoted to consumer electronics.

"Right now, healthcare is our biggest focus," said Nypro chief executive Ted Lapres. "There's an opportunity in China as the middle class grows and spends more on healthcare."

Consumers in other nations, such as China, will have to pick up more of the spending load from US consumers in coming years, economists said. Just as the United States borrowed, consumed, and imported too much, other nations saved, produced, and exported too much. Now, the global economy must find a better balance.

For the United States, it begins with saving more and exporting more, said Nariman Behravesh, chief economist at IHS Global Insight in Lexington. Between 1992 and 2005, the US savings rate plunged from nearly 8 percent of after-tax income to less than zero - meaning households spent more than they took home, according to the US Commerce Department. During this same period, the US trade deficit ballooned to more than $700 billion from less than $40 billion.

A nation with a trade deficit imports more than it exports, meaning it must borrow from foreign investors to finance its purchases. By increasing savings, the country won't need to borrow so much from foreigners, Behravesh said. So instead of money going overseas to pay interest, it can stay here to be invested to make the nation more productive and its goods and services more competitive in world markets.

"We need policies that are going to encourage us to save instead of spend," said Behravesh. "We can still grow jobs, but in different areas. Less retail, more software."

Robert Gavin can be reached at rgavin@globe.com.

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