The American economy – Still kicking

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Reports of the death of the American consumer are greatly exaggerated

What are America’s consumers up to? When the plunging oil price made petrol (gasoline) cheap, economists expected them to head to the shops and spend more. But growth failed to pick up, causing a rethink. Data released on January 29th showed that the economy grew by just 0.7% (annualised) in the final quarter of 2015, with slowing consumption partly to blame.

Now many analysts are claiming that consumers have saved the fuel-price windfall. The reality, though, is more nuanced. Americans—though more cautious since the financial crisis—have spent most of their recent income gains. And consumer spending continues to drive growth.

In 2014 consumers spent an average of $2,500, or 4.2% of their income after tax, on petrol. A year later refilling the tank had become almost a third cheaper. That gave households a windfall of about $650, or 1.1% of their 2014 income. Rising employment and modest wage growth chipped in to boost their real (ie, inflation-adjusted) income by 2.7%.

Furthermore, MGI finds that social media plays an increasingly important role in connecting people in emerging economies to the developed world, thereby opening new opportunities for work, learning, and personal connections. The share of Facebook users with cross-border friendships is higher in emerging countries than in developed ones (54 versus 44 percent)—and it is growing rapidly, having posted a 3.6 times increase from 2014.

Beyond building personal networks and friendships, individual participation in these global platforms has important economic implications. For businesses, digital platforms provide a huge built-in base of potential customers and effective ways to market to them directly. And as social media exposes consumers from around the world to what’s available, products can go viral on an unprecedented scale. Adele’s recent hit “Hello” racked up 50 million views on YouTube in its first 48 hours, and her smash album 25 was number one on the download list of iTunes stores in 110 countries during its first week of release. For individuals, these platforms offer new ways to learn, to collaborate, and to develop capabilities—and to showcase talents to potential employers.

Small and midsize enterprises (SMEs) that join online marketplaces are taking advantage of this potential to scale up rapidly and connect with customers and suppliers anywhere in the world. Facebook estimates that its platform includes more than 50 million such companies, up from 25 million in 2013—and some 30 percent of their fans are cross-border (Exhibit 2). Amazon now hosts some two million third-party sellers. The share of SMEs that export is over seven times higher on eBay than among offline businesses of comparable size. PayPal enables cross-border transactions by acting as an intermediary for SMEs and their customers. Microenterprises in need of capital can turn to platforms such as Kickstarter, where nearly 3.3 million people, representing nearly all countries, made pledges in 2014. The ability of small businesses to reach global audiences supports economic growth everywhere.

 

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