Practical Economics


Consumers: The Recovery Can't Rebound Without Them

Art Pine

The debt ceiling debacle and stock market slide have blunted consumer confidence.



Don’t look for consumer spending to play its traditional role of pulling the U.S. economy out of its slump. Indeed, the challenge now is to keep Americans from pinching their pennies even more—a factor that would risk turning the current anxiety about another recession into a self-fulfilling prophecy.

SEE ALSO: How Well Do You Know the Debt and Deficit?

Consumers already were cautious before the latest debt ceiling battle and stock market gyrations. Consumer spending had begun to pick up slightly in May, but it still wasn’t on track to provide much of a tonic for the economy. Even so, there was some reason to hope that Americans might be feeling more secure—and more willing to spend.

But Congress’ handling of the debt ceiling bill, the downgrading of the U.S.’ credit rating and the recent stock market slide have dealt a serious blow to consumer confidence, prompting many Americans to worry either that the economy is heading for another recession or at least that jobs will be scarce far longer than they expected.

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Fresh figures released Aug. 12 show that consumer confidence fell sharply in the wake of the debt ceiling debate and stock market slide. The Thomson Reuters/University of Michigan confidence index plunged 8.8 points, to 54.9—its third dip in three months and its lowest point since 1980. A Gallup poll in early August showed a similar decline.

Consumer spending traditionally has been the leading edge in spurring an economic recovery. Outlays by consumers account for some 70% of the economy’s output. Whatever other reasons employers may have for creating more jobs, they won’t increase hiring unless they believe more people are ready to buy their goods or services.

The economic statistics show that consumer spending has been lackluster for months. Consumer outlays fell 0.2% in June—the biggest drop since 2009. Personal income edged up 0.1% that month. On Aug. 12, the Commerce Department reported that retail sales rose 0.5% in July, but much of that went on spending for gasoline.

There’s little on the horizon to suggest that consumers may begin to open their wallets anytime soon. Many are still burdened by debt from the housing bubble and are trying to rebuild their balance-sheets. Overall, the economy has worked off only about a quarter of the defaults stemming from the 2009 collapse.

During the late 1990s and early 2000s, consumer spending was buoyed by what economists called the “wealth effect.” Soaring house prices, easy mortgage refinancing and climbing stock prices made Americans feel more comfortable financially than they actually were. Now, with all three of those trends reversed, consumers feel stressed.

By some measures, Americans in the top 20% of the income scale account for more than half of all consumer spending. But higher-income families may become more cautious in the wake of the stock market slide. Retirees also are likely to be hard hit. Even a small cutback in spending by these groups could help tip the economy into a slump.

Moreover, there’s nothing else around to help spur the U.S. economy this year or next. Exports have increased in the face of a rapidly falling dollar, but sales abroad aren’t strong enough to have much impact on U.S. growth. And the latest figures show U.S. exports declining, despite a low dollar, making trade a drag on the economy, not a spur.

Oil prices have fallen in the past few weeks, giving consumers more cash to use elsewhere, but consumer sentiment hasn’t reflected that yet. Housing will be moribund for some time, until house prices begin rising again. And Congress is hamstrung, unable to cut taxes or provide spending stimulus.

Without a spur from one of these sources, the job situation won’t pick up, either. That, in turn, will keep consumer confidence depressed. There’s a certain chicken-and-egg relationship at work. Employers won’t add jobs until they see consumers buying again, but consumers won’t start buying until they see the jobs picture improve.

At the same time, with wages stagnant and productivity now on the decline, Americans aren’t likely to see their incomes rise significantly anytime soon. Indeed, if Congress ends the current payroll tax cut in December and takes away extended jobless benefits, it will squeeze consumers even more.



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