Ezrati’s Economic Outlook: The Consumer Is Back

Recovery in household spending could be a mixed blessing.

Americans, it seems, are spending again. Since late 2011, measures of consumption show acceleration in virtually all categories, despite the recent rise in gasoline prices. In one sense, this is good news for the economy, as it will push the pace of overall growth and ultimately prompt more hiring, which, in itself, will reinforce spending growth. The stock market has welcomed the flow of news in just this light, rising on each new sign of freer consumer spending. But—and there always is a but—this new trend raises longer-term concerns. More liberal consumer spending can only take the economy so far. Because heightened levels of consumption will limit households’ ability to make needed improvements in their finances, any effort to boost outlays too far too fast would only threaten pinched finances, resulting in spending cutbacks at a later date, say 2014 or 2015, with all the recessionary influence that would impose on the general economy.

Up until the closing months of 2011, consumers spent with extreme caution. Because the severe recession of 2008-09 created an understandable aversion to spending and debt, households favored saving over spending. In 2010, for instance, they increased spending only 3.8% but raised their savings flow to 5.2% of their after-tax income, to $588 billion a year, a jump of 28% from 2009. A similar pattern prevailed for much of 2011. Some of this savings flow went to asset purchases. Much went to pay down overall household debt, which fell by about $370 billion from late 2009 through the third quarter of last year. Every major personal debt category declined, from mortgages and auto loans to consumer credit, home improvement debt and general bank loans.

About the Author

Milton Ezrati

Milton Ezrati

Milton Ezrati is senior economist and market strategist for Lord Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, linking aging demographics and globalization, will appear next summer from Thomas Dunne Books of St. Martin’s Press. See more of his articles about the economy here.



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