The American consumer is but a shadowof its former almighty self. Personalconsumption in the United States expanded at only a 1.5% annual rate in real(inflation-adjusted) terms in the second quarter of 2012 – and that was no aberration. Unfortunately, it continues a patternof weakness that has been evident since early 2008.

Over the last 18 quarters, annualized growth in real consumer demand hasaveraged a mere 0.7%, compared to a 3.6% growth trend in the decade before thecrisis erupted. Never before has theAmerican consumer been this weak for this long.

The cause is no secret. Consumers made huge bets on two bubbles – housing and credit. Reckless monetaryand regulatory policies turned the humbleabode into an ATM, allowing families toextract dollars from bubbles and live beyond their means.

Both bubbles have long since burst, andUS households are now dealing with post-bubble financial devastation – namely,underwater assets, record-high debt, and profound shortages of savings.At the same time, sharply elevated unemployment and subparincome growth have combined to tighten the nooseon over-extended consumers.

As a result, American households have hunkereddown as never before. Consumers are divertingwhat little income they earn away from spending toward paying down debt andrebuilding savings. That is both logical and rational – and thus not somethingthat the USFederal Reserve can offset with unconventional monetary easing.

American consumers’ unprecedented retrenchmenthas turned the USeconomy’s growth calculus inside out.Consumption typically accounts for 70% of GDP (71% in the second quarter, to beprecise). But the 70% is barely growing, and is unlikely to expand strongly atany point in the foreseeable future. That puts an enormous burden on the other30% of the USeconomy to generate any sort of recovery.

In fact, the other 30% has not done a bad job, especially considering thesevere headwinds coming from consumers’ 70%.The 30% mainly consists of four components –capital spending by firms, net exports (exports less imports), residential construction, and government purchases. (Technically, the pace ofinventory investment should be included, but this is a cyclical buffer betweenproduction and sales rather than a source of final demand.)

Given the 0.7% trend in real consumption growth over the past four and ahalf years, the USeconomy’s anemic 2.2% annualized recoveryin the aftermath of the Great Recession is almost miraculous.Credit that mainly to the other 30%,especially to strong exports and a rebound in business capital spending.

By contrast, the government sector has been moving in the oppositedirection, as state and local governments retrenchand federal purchases top out afterpost-crisis deficit explosions. The housing sector has started to recover overthe past five quarters, but from such a severely depressed level that itsgrowth has had little impact on the overall economy.

Given the strong likelihood that consumers will remain weak for years tocome, America’sgrowth agenda needs to focus on getting more out of the other 30%. Of the fourgrowth components that fall into this category, two have the greatest potentialto make a difference – capital spending and exports.

Prospects for these two sources of growth will not only influence the vigor, or lack thereof,of any recovery; they could well be decisive in bringing about an importantshift in the USgrowth model. The 70/30 split underscores the challenge: the US must faceup to a fundamental rebalancing – weaningitself from excessive reliance on internaldemand and drawing greater support from external demand.

Capital spending and exports, which together account for about 24% of GDP,hold the key to this shift. At just over 10% of GDP, the share of capitalspending is well below the peak of nearly 13% in 2000. But capital spendingmust exceed that peak if US businesses are to be equipped with state-of-the-art capacity, technology, and privateinfrastructure that will enable them to recapture market share at home andabroad. Only then could export growth, impressive since mid-2009, sustainfurther increases. And only then could the US stemthe rising tide of import penetration byforeign producers.

The other 30% is also emblematic of adeeper strategic issue that Americafaces – a profound competitive challenge. A shift to external demand is notthere for the asking. It must be earned by hard work, sheer determination, anda long overdue competitive revival.

On that front, too, Americahas been falling behind. According to the World Economic Forum’s GlobalCompetitiveness Index, the US slipped to fifth place in2011-2012, from fourth place the previous year, continuing a general downwardtrend evident since 2005.

The erosion is traceable to severalfactors, including deficiencies in primary and secondary education as well aspoor macroeconomic management. But the US also has disturbingly lowrankings in the quality of its infrastructure (#24), technology availabilityand absorption (#18), and the sophistication and breadth of its supply-chainproduction processes (#14).

Improvement on all counts is vital for America’scompetitive revival. But meeting the challenge will require vigorous growthfrom America’sother 30% – especially private capital spending. With the American consumerlikely to remain on ice, the same 30% must also continue to shoulder the burdenof a sluggish economic recovery.

None of this can occur in a vacuum. Theinvestment required for competitive revival and sustained recovery cannot befunded without a long-overdue improvement inUS saving. In an era of outsize governmentdeficits and subpar household saving, thatmay be America’stoughest challenge of all.