It’s the Spending Stupid!

News reports are commenting on how the US consumer is spending less these days.
Why is consumer spending so important to the recovery of our economy? What about government spending, corporate spending, industrial or agricultural spending? Shouldn’t these numbers far surpass the spending of Johnny Lunchbox?

Consumer spending taps into the very psych of the consumer. Think of it like a pulse on a patient in a doctors care. If the pulse is weak it says much about the patients overall health. Consumers spend with their emotions. Low confidence about future employment will equate to low spending at the retail counter. So if consumers are less confident are there any economic benefits to reduced consumer spending?

Consumer spending accounts for a whopping 60% of the US Job growth. Needless to say it is a key to the the economic recovery equation and 1.3% of the US growth rate is tied to consumer spending. Though second quarter 2010 GDP grew at a solid 3.2% annual pace that’s slower than the 5.6% pace of the previous quarter. This news arrives against the backdrop of a national unemployment rate that stubbornly remains at 9.5%. All this means that our economy is not changing anytime soon because the consumer has no confidence in the near term recovery.

The only benefit to not spending cash is saving cash. In the second quarter, the consumer savings rate was 6.2%, up from 5.5% in the prior two quarters. That’s much better than the anemic savings rate of just 2.1% in 2007. If there is a silver lining to the slow economic recovery it is that the typical US consumer is reducing debt, saving more and being frugal with what they purchase. If we can maintain this pace the consumer will come out of this more stable and more financially sound. It is the spending that makes us or breaks us.