Have you focused on the effect a serious slowdown in U.S. Consumer Spending may have not only on the U.S. economy, but importantly on the economies of China and other developing countries – and the potential significance of this to your equity investments?

For many years The Peoples Republic of China (‘PRC’) has reported an annual GDP growth rate in the order of 8% – 10%, creating unprecedented demand and upward pressure on prices for basic commodities such as copper, nickel and crude oil. While there are many economic issues related to China that bear directly on the economic wellbeing of the U.S., we believe perhaps none is as important as how a serious slowdown in U.S. consumer spending would affect China’s GDP growth rate and behavior – in particular how the PRC would deal in such circumstances both with the large amounts of U.S. dollars it holds (arising in large part from China’s trade with the U.S.) and its continuing purchase of raw materials required to fuel its growth. Based on our reading we have come to believe U.S. consumer spending is significantly important to both U.S. and global economic growth, with the consequence that if U.S. consumers significantly reduce consumption the world (read China in particular) macro-economic engine may slow down materially.

Tthe U.S. Consumer Confidence Index (‘CCI’) declined by over 42% in the twelve month period ended April 30, 2008. The CCI is a monthly measure of the degree of optimism consumers express through saving and spending. This is an ‘attitudinal’ statistic, and may or may not be reflective of actual U.S. consumer spending going forward. However, it is worrisome, and not unexpected in light of (among other things) current declining U.S. Housing prices and historically high gasoline prices.

Whereas there is evidence of increasing consumer spending and individual savings/investment in China, we know of no statistic that points to the comparative importance of U.S. and Chinese consumers to the continued growth of the Chinese economy at recent year levels. Certainly over time one would expect a scenario where Chinese personal consumption by itself go some distance to sustaining China’s manufacturing base, but that balance is many years away. At that point in the maturity of the internal economy of the PRC a serious downturn in U.S. consumer spending would not have the same material effect on Chinese economic growth and hence on commodity demand as it might have today. Having said that, as best we know it is a big unknown as to what current near-term effect on Chinese economy would result from the U.S. Consumer running out of ‘spending gas’. In such circumstances the question of how the PRC would deal with its extensive U.S. dollar holdings is a separate question, but one we think needs to be carefully considered.

We believe one needs to focus closely on these things when strategizing their current and prospective equity investments.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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