Economist’s Corner: The American Consumer

The American Consumer—Will You Spend or Save?

Written by: Dr. Lynn Reaser

Consumers are being closely watched. The financial system seems to be healing and the housing market is showing glimmers of hope. But, consumer spending accounts for about 70% of the U.S. economy and American households will be critical to any hope for a global recovery. A year ago, consumer spending imploded as the collapse of Wall Street spread to Main Street. Cascading home values and stock prices combined with a steep rise in unemployment to devastate retail sales. A year later, consumers may be starting to venture back to the malls.

Retailers reported a nearly 3% rise in August sales compared with July. The “cash for clunkers” program gave a big boost to auto dealerships and higher gasoline prices pushed up sales at gas stations. Consumers also spent more at restaurants, department stores, and shops selling clothing, electronics, books, and sporting goods. It remains to be seen whether the improvement will carry through to the vital Christmas and holiday season.

The deeper question centers on whether American consumers are undergoing a “cultural shift,” where they have been so traumatized by recent events that they continue to save at higher and higher rates. Or, as the housing and stock markets improve, will they regain enough confidence to begin spending a little more freely. The saving rate has moved from 1% to around 4-5%. If it stabilizes at current levels, consumer spending will just keep pace with income growth and not drag the economy down. Clearly, consumers will be pivotal to the economic outlook. Retailers will need to be more attentive to their existing and potential customers than ever before.


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