I don’t understand how the U.S. economy can possibly avoid a very sharp contraction in coming months (and perhaps years), and how this contraction will not be reflected in diminished standards of living for most Americans.
About 70 percent of our gross domestic product (GDP) comes from consumer spending. The sources of this spending are either earnings, savings. personal asset appreciation, government benefits that subsidize other spending, or borrowing.
Unless these sources collectively generate more real (i.e. non-inflation) spending power, the real (non-inflation) economy can’t grow. And these real sources of spending are either stagnant or actually contracting.
With respect to earnings. Our unemployment rate is very high, almost 9 percent, and likely to stay at an elevated level for years to come according to virtually every estimate from every source I’ve recently encountered, And the new jobs that are being created seem overwhelming to be the low wage, few if any benefits variety. Worker ability to demand higher wages is obviously limited in most industries. So where’s the extra spending potential from this source? Sure, people may spend more on gas and food, but that isn’t real, non-inflation spending growth. Spending more for the same things is not a route o real economic growth.
More spending from savings? That may be a short-term solution for many people. Though people who can save more rather than spend more are doing so because of their economic fears about the future, A great deal of savings, it should also be realized, is in retirement accounts that can only be tapped for spending purposes with a hefty penalty. So where’s a big spending boost from savings going to come from?
Personal assets appreciation? Housing values, the middle class traditional piggy bank, are in the deep hole with no exit in sight. As for investments in the stock market — well, the stock market is booming alright, but not because the little guy has jumped in to get his piece. Small investors are still mostly on the sidelines, recognizing the current big bank stock market lemming run for what it is. So its mostly Wall Street insiders not Main Street consumers making out big time from this gaming, and not boosting major consumer spending all that much in consequence.
Government benefits that subsidize other spending? Please. Why even mention that as a source of potential economic growth and consumer spending enhancement. Federal and local government spending is contracting by the day. The two percent Social Security tax knockdown is likely to be the last big Main Street gimme in this realm. Another big federal spending binge, the Fed’s money printing to buy government bonds, is winding down, too.
Which brings us to borrowing. Are you getting a lot more offers in the mail from banks to get new credit cards with exorbitant limits? No? Well, there’s your answer on that source of big new consumer spending.
So…70 percent of economic activity in this country is the result of domestic consumer spending that is already falling or about to fall dramatically because its sources (at least its non-inflation related sources) are drying up. So why would anyone think we aren’t on the lip of a truly scary new economic dip?