Many commentators–Kash (Personal Income and Spending ) and Nouriel (U.S. Consumers at the Tipping Point? Retail Sales Down in April for the First Time Since 2003), for example–are worried that the U.S. consumer might be tiring. We have heard all the reasons—savings rating negative, weak labor income, MEW slowing.
Counter to this slow down, the stock market has done remarkably well. If the stock market is any indicator of the future, then certainly it should have picked up the signals that Kash and Nouriel have so well documented. In fact, silly hecklers often foolishly greet Nouriel’s predictions. I, for one, agree with Nouriel’s assessment: The last shoe to drop will be the consumer running barefoot through the park.
However, I would like to pose a question: Is the stock market missing the signals here? Or does the stock market know something both Kash and Nouriel are missing?
I think it is possible. In fact, I think it is entirely possible for the stock market to remain sturdy, for corporate profits to remain robust, and yet for the U.S. economy to enter a mild recession. I offer two observations. The first I have discussed in an earlier thread (China: Diversifying its Markets). The second is based on a study by the Japan’s Ministry of Finance, a study Divorced One brought to my attention. (Caution: In accessing this study, you may have to download a Japanese font filter of some size.)
To recap the China’s Diversifying its Markets: U.S. share of Chinese exports dropped from 31% in 2000 to24% last November to 22.7% this February. This fact certainly does support the idea that the American consumer is slowing; after all, what don’t we buy from China? Additionally, China’s exports to the European Union have increased; the euro is stronger.
In that piece, I asserted the following:
A strong U.S. stock market, is reflective more of U.S. companies abroad than our own economic health.
The Japan study I found fascinating, particularly chapter 3, “Prospect of Rate of Return Gap between USDIA and FDIUS.” In discussing USDIA (U.S. Direct Investment Abroad) and FDIUS (Foreign Direct Investment in the U.S.), the study backed out an amazing statistic:
Total sales of foreign affiliates of U.S. companies exceed by 2.4 times the U.S. total exports.
This indicates that U.S. companies tend to choose to deliver goods through foreign affiliates to international markets rather than to export them from the U.S.
Clearly, U.S. firms are choosing to use foreign affiliates that are beneficial for a number of reasons, not the least of which is cheap labor and tax breaks, i.e., developing countries. And, yes, China is included here.
Consider for a moment an article in Forbes, The World Is Wall Street’s Oyster:
The whole world can be found at the intersection of Wall and Broad streets in New York. While the American economy sputters, big U.S. companies are doing just fine as their multinational reach allows them to profit from stronger growth elsewhere.
Peter Moricci knows where the action is and will be. In an email, he writes the following:
Also, the trade deficit shifts the production of new and innovative products offshore, reducing high-value employment immediately and increasing the likelihood that next generation products will be developed as well as made abroad.
Peter Moricci, by the way, was the former Chief Economist at the U.S. International Trade Commission.
The stock market is not missing any signals. It is well aware that the U.S. consumer is tiring. But other markets remain strong and our companies are well positioned to take advantage of this fact.
In case Krugman has not noticed, our companies left on an overseas flight to China; next stop, India; then on to Vietnam when the WTO says “ok.”
Yup, our trade deficit has nothing to do with corporate profits.
Next flight out: R&D. It is going to an interesting slide, America.