Oct 7th, 2008
Why the Main Driver of the Economy Can’t Increase Spending Forever
What’s the main driver of the U.S. economy?
The answer is in your mirror. It’s you.
Consumer spending is the biggest single factor in the well being of the U.S. economy. Notice how the second quarter (2.8% annualized growth of gross domestic product) wasn’t so awful? That coincided with the delivery of economic stimulus payments going out across the nation. Those dollars got spent, and the spending helped the economy.
While the economy has grown over time, driven by spending, during that same time the savings rate of those in the U.S. became negative–people spent more than they made. Anyone can tell you that can’t go on forever. People went into typical consumer debt (including credit cards) and then, hanging on the coattails of the housing boom, took out home equity to keep spending.
All things come to an end.
The current credit crunch and real estate debacle have devastated these money supplies; combine that with the increase in fuel prices (which follows into the realm of essentials), and it’s clear that the average consumer can’t keep pumping more dollars into the economy, because they don’t have the dollars to do so–not even borrowed dollars.
Until consumers can somehow put more dollars into the economy, the economy will continue to suffer, and until the economy improves, it’s hard to imagine consumers putting more dollars into the economy. Seems like a Catch-22? In many ways it is, but that’s the situation we’re facing ourselves in today. Stay tuned!
