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Another Failed US “Wealth Effect”

Company Strategy, Economics, US
By John Richardson on 04-Dec-2014


By John Richardson

HERE are some alarming facts about the US economy:

  • The wealth of the average American tops $301,000 per adult, which left  the US in fourth place in the latest Credit Suisse Global Wealth report.
  • But median wealth was a mere $44,900 per adult. That was only good enough for 19th place in the Credit Suisse survey, below Japan, Canada, Australia and much of Western Europe.
  • The super-rich, defined as those with assets of more than $100 million, controlled 11% of total US wealth in 2012. This compares with 4% in the mid-1980s, according to a University of California Berkeley research paper.
  • But between 2007 and 2010, the median wealth of an American family fell by 40% to $77,300, according to the latest Federal Reserve statistics. This compares with a median net worth in Australia of $219,500.

So why this alarming rise in inequality, which, regardless of your political persuasion, has to be a concern for growth in chemicals demand? If the population as a whole has become poorer, this does not bode well for demand.

Fewer Americans own stocks (52%) than own houses (65%) is one reason. The tremendous recent strength of US stock markets has, as a result, failed to compensate for the sub-prime housing collapse.

The other reason is demographics. By 2030, 41% of the US population will be in the “New Old” category (older than 55) compared with 29% today.

We also know that in 2001, the oldest Babyboomer turned 55.

This wouldn’t matter if older people spent as much money as young people. But instead in the developed world:

  • People in the 25-34 age range spend an average of $48,000 per year.
  •  Their spending then increases to $58,000 in the 45-54 age range, as the kids grow up and income levels increase
  • Spending then drops to just $45,000 when you are 65-74 years old.

The problem is that US policymakers still don’t get it and so have repeated the mistakes of the past.

The disastrous sub-prime housing bubble was an attempt to create demand where there wasn’t really demand – i.e. a “wealth effect” amongst Americans who were already rapidly ageing.

And since 2008, we have of course seen several rounds of quantitative easing (QE) by the Fed.

As the data at the beginning of this blog post indicates, this latest attempt to create a “wealth effect” has been much more narrowly based than the sub-prime boom. The rich, the very rich and the super-rich have become a lot richer thanks to surge in stock markets, whilst real demand in the real economy has weakened even further.

Stagnation in wages for the majority of American citizens provides more support for this argument. Median household income was $51,017 in 2012 compared to $56,080 in 1999, according to the US Census Bureau’s most recent statistics.

Take a look at the above chart as further evidence of weakening demand in the real economy. It shows the dramatic fall in US consumption of phenol since 2000.

Phenol is a petrochemical product that goes into a wide range of downstream applications. These include phenolic resins, which are widely used in the construction industry, polycarbonate that is used to manufacture CDs and automobile – and also nylons. The biggest driver of demand  growth for  nylons these days is for nylon resins that are used to make automobile.

Where do we go from here?

1.) The American middle class will continue to struggle – and so the idea that the American consumer can “rescue” the global economy is really just old hat. US consumer spending, in meaningfully adjusted historical terms, must be a drag on global growth in 2015

2.) Much more importantly, the Fed’s latest attempt to create a sustainable “wealth effect” has created some very frightening global economic imbalances. Tomorrow, I will look at these imbalances as I complete my series of posts on the new global financial crisis.