Will U.S. consumers make the comeback we need to stave off another recession? That’s a question markets and economists have been pondering ever since the Fed announced it would keep interest rates low until mid-2013. The Fed’s pledge aimed to pump up borrowing and spending to egg on much-needed U.S. growth. But with consumer confidence at its lowest levels since 2008 and many investors still fleeing to Treasuries, the almighty American consumer appears to be hunkering down. And there’s another problem: Our rock-bottom rates may be setting back other economies. Chinese inflation is rising fast, thanks in part to the Fed’s low interest rates and bond-buying sprees. So if inflation in China continues to rise, will U.S. consumers (and the U.S. economy) be even worse off?
American closets and cupboards, after all, seem to be chock-full of stuff “Made in China.” It makes sense that, if prices in China are rising, our lives would become more expensive. But we may actually be more insulated from China’s inflation troubles than many Americans think. According to a new paper by the Federal Reserve Bank of San Francisco, the U.S. consumer doesn’t actually buy all that much Chinese stuff. In fact, most goods and services sold in the U.S. are still produced at home. Imports from China last year made up roughly 2.5% of U.S. GDP, while 88.5% of U.S. consumer spending is on stuff made right here in America, the paper notes. Most of our spending (roughly two-thirds) is on local services like healthcare, transportation, medical care, and recreation. The stuff we do buy from China tends to be furniture, household equipment, clothing, and shoes, all of which weigh less on U.S. paychecks.
What’s more, what we do pay for Chinese goods doesn’t all go to the Chinese manufacturer. There are all sorts of domestic costs feeding into retail prices for Chinese goods, like the transporting of those goods within the U.S., the rent to store the stuff before it gets bought, and the costs to advertise Chinese-made products to you and me. 36% of the price U.S. consumers pay for foreign goods actually goes to U.S. companies and workers, and for Chinese stuff, the U.S. share is even higher. For every dollar spent on “Made in China” goods, 55 cents goes to services produced in the United States.
This is all good news for besieged U.S. consumers. The less the costs of our purchases trace back directly to China, the less we get saddled with Chinese inflation. So even though China’s 2011 inflation rate is close to roughly 5% (ours is closer to 3%), the price of Chinese imports had only increased 2.8% in May from a year earlier. That’s partly because Chinese products aren’t typically assembled from Chinese parts; many of their inputs come from other countries, where inflation rates may be different.
All this suggests that U.S. consumers won’t pay directly for Chinese inflation. But there are other ways China’s inflation woes could damage the U.S. Many U.S. multinationals are now banking on Chinese consumers to fuel their companies’ growth. Goldman Sachs, for instance, has predicted the Chinese will be buying a third of the world’s luxury goods in less than a decade. But the more Chinese inflation cuts into Chinese wages, the less foreign demand there will be for U.S. goods. And that could drive down the hefty U.S. profits that have buoyed our economic recovery. So what goes around may come around, one way or another.