http://www.nytimes.com/2013/02/01/business/growth-in-consumer-spending-slows.html?ref=business
Consumer's income grew by 2.6%, the largest amount in eight years, during December, but their spending slowed from a 0.4% increase in November to a 0.2% increase in December. Starting this month, consumers will receive less take-home pay to take home. This will cause a decrease in consumer spending throughout the year. This could be a major problem for the country, since consumer spending makes up seventy percent of economic activity. The Congress and White House were able to prevent an increase on income taxes for all but the wealthiest Americans but the temporary reductions in Social Security taxes were eliminated, which will cause households to have thousands less to spend. If consumer spending continues to slow, it could mean a decrease in demand for goods and services, which means a decrease in production as well. This could greatly hinder any progress the economy is making.
As we're a consumer driven economy, it may be fair to say that U.S. long-term growth prospects may have been harmed by the consumer boom that played out in the many years before the recession. Standard theory suggests that an economy must continuously invest in new capital goods and structures in order to grow, become more productive and raise the population's living standards over time. However, if consumer spending "crowds out" investment spending, the economy may not grow as fast.
ReplyDeleteOn top of that, higher investment spending has been associated with higher economic growth, while years of relatively high consumer spending have been associated with relatively low economic growth in the U.S. This just shows that people have to keep this in mind when considering how to improve our economy.