Howard's End: U.S. Consumer Confidence Critical

Consumer confidence indicators due out this week will be the critical factor in determining whether the U.S. economy slips from merely sluggish performance to negative growth signaling the start of a recession. John Howard writes.

Growing consumer caution and the unseasonably cool weather saw large U.S. retailers take a hammering in March leaving them with sales well below expectations.

Federal Reserve chairman, Alan Greenspan, has long seen consumer confidence as the benchmark for further interest rate cuts because consumer spending accounts for two thirds of annual GDP.

Yet U.S. companies even now are not having difficulties securing credit but the Fed is still likely to ease short-term interest rates further. At its meeting on March 20 it hinted that it was ready to approve a further easing in monetary policy before its next session scheduled for May 15.

Company inventories have declined marginally but until inventory levels are brought back in line with sales, companies will struggle for profits.

Coupled with higher energy costs, weaker housing starts, lower industrial output, a contracting job market and the volatility on Wall Street, the consumer worry factor is now high and spending is low.

New energy efficiency standards released by the Bush administration last Thursday requiring new washing machines and water heaters to use less energy have also come at a bad time for consumer confidence. The energy efficiency standards will add $240 to the price of a new washing machine.

Therefore, it is not surprising that a preliminary index of April consumer confidence prepared by the University of Michigan has plummeted to its lowest point in eight years.

U.S. policymakers and Wall Street are also awaiting a spate of key indicators to be released this week that will likely show a gloomier picture prompting the Fed to intervene yet again.

The standoff between the U.S. and China over the spy plane incident has also caused consumers to place the growing trade deficit with China back on their radar screen. In January alone, the U.S. ran a $7.2 billion trade deficit with China and last year it did $116 billion in trade.

Americans, who paid little attention to foreign affairs and whose memory of Tiananmen Square is faint and knew nothing of China's treatment of Falun Gong, suddenly became focused. They were emailing their outrage to companies like Kmart and passing up Chinese goods in the aisles of most retail stores right across America.

Americans are also waking up to the fact that many Chinese exporting companies are owned and operated by the People's Liberation Army who use prisoners in political labour camps for production of export goods.

What ultimately brought the standoff to an end was not diplomacy, but trade.

China and Asia cannot survive without America purchasing their goods and U.S. companies have been seriously investing much-needed billions of dollars into China and also upgrading Chinese military hardware. The signal to the politicians from the business community went out to both sides - "pack it in."

Already Washington analysts are talking about forming new strategic alliances with other countries with one calling for ".....a deeper relationship with Australia, the only truly long-term U.S. ally in that corner of the globe."

The Chinese People's Daily reported Helen Clark saying that China was "a good friend." But I can tell you it didn't go unnoticed in the U.S. that we have only called America "a friend."

We can't afford to put too many of our eggs in the Japanese basket either. The Japanese Education Ministry's move to re-write its historical textbooks which gloss over the country's wartime aggression has angered most of Japan's Asian neighbours, including China and Korea.

The textbooks refer to Japanese troops as "valiant" and that its occupation of the Korean peninsular was in line with international law and labelled the Nanjing Massacre as being "nothing on the scale of the Holocaust."

So where does all this leave New Zealand? Treading very, very carefully and our politicians mostly keeping their mouth shut.

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