Consumer Spending Is The Backbone Of GDP

Monday, January 4, 2010, 6:58 AM | 1 Comment

Gross Domestic Product is commonly known as the GDP of a country. Economists and finance experts say that the main engine of the U.S. economy is consumer spending which accounts for two-thirds of the GDP. So let’s say nobody buys anything – I mean nothing at all – the U.S. economy might collapse. It might not be able to sustain and maintain itself on the remaining one-third of other things – whatever that may be.

If consumer spending is considered the engine, then consumer credit – all kinds – have to be the fuel for it. And we all know that steady paycheck and easy credit was a lot less available the last couple of years – in some cases almost nil, zilch. We have been seeing the net result in the form of a lousy economy.

The good times have rolled out

The parts of the engine have gotten old and weary. Without the fuel, the engine has worn out. One of the biggest part that is aging is the 78 million baby boomers who have lost more than $12.2 trillion (that’s spelled with a t) in their retirement accounts and equity in their homes.

The U.S. economy clearly needs new financial blood in the form of consumer spending – the two-thirds part. However, the personal saving rate rose to an average of 4% in 2009. It’s safe to say that there is a chill in consumer spending.

The time has then come for the engine to rev up again. But how? To me, it seems a catch-22 kind of scenario. The economy needs consumers to spend, spend, spend. But at the same time, in their personal financial life, they need to save, save, save.

Lately, much of the boost in consumer spending, in the third-quarter of 2009, was due to federal stimuli, in particular the “cash for clunkers” car discount program. However, that ended in August 2009 and in September, consumer spending fell 0.5%. Some economists forecast that because of jobs loss and the almost non-existent wage growth, GDP growth would be less than 3% in 2010 and beyond.

The good times will roll in but when?

Some experts say that it will be 2013 or 2014 that we will see improvements in the economy especially unemployment rate to the tune of 5%-6%, with their fingers crossed while others say it will take maybe a decade. The Consumer Confidence Index (CCI) rose again and stood at 52.9 in December, according to The Conference Board. For a healthy economy, it should be 90 or above. So the U.S. economy has a long way to go or rather grow.

If consumers are “mildly” optimistic about the general economy, they are practically in despair over their personal financial condition. They have lost jobs, work hours, and bonuses if they ever received them.

In a Nutshell
As a result, I think consumers will continue to put their one foot on breaks in terms of spending and the spending lag, and not the lead, will be the norm of the day in the coming years.

It seems that Americans will spend more on cheaper private-label brands, keep their appliances and cars longer, not moving to bigger homes – instead probably adding a room or two to their existing dwellings. In the years bygone, the rate of consumer spending had been 3.5% for more than 30 years. In the foreseeable future, it will drop to 2.5% or less – I hope not less than 2.5%.

I will wrap up this post with a question: “Has any economist or finance expert come up with an optimum for spending and saving so the U.S. economy comes to experience a balance between the two – spending and saving – in the foreseeable future?”

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  1. One Response to “Consumer Spending Is The Backbone Of GDP”

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