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U.S. Consumer Spending—A Detour to Prosperity?—Viewpoints | EPI

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U.S. Consumer Spending — A Detour to Prosperity?

by Eileen Appelbaum

For all the good news about record job growth and rising real wages, the American economy is like a race car that’s speeding down the track with only one cylinder running at full power.

While consumer spending is going into overdrive, other forces that fire up economic growth — public investment and international trade — are sputtering. Mixed news on profit growth suggests business investment may also slow.

Consumer spending makes up two-thirds of the economy, but increases accounted for an astounding 85 percent of the growth in the gross domestic product last year. And it’s fueled by unsustainable efforts by most families. Consumer debt, from credit cards to home mortgages, now totals about 85 percent of personal income — with installment loans accounting for $1.4 trillion. Personal savings actually turned negative in the second half of 1998.

Families have kept their heads above water by working more hours — indeed, middle income couples with children are putting in an average of six full-time weeks more each year than a decade ago.

At today’s level of consumer debt, an increase in interest rates, a new wave of corporate downsizing, or a cutback in overtime hours would force families to curtail their spending — and even push many into bankruptcy.

Yes, the stock market is still high. But if trouble strikes, the Wall Street run up in stock prices won’t bail most families out. Forty percent of U.S. households have less than $2,000 in stocks — and that includes the stock in their pension plans. Another 20 percent have less than $10,000 in stocks.

Meanwhile, other economic indicators are also alarming. Profit growth slowed last year (threatening a future slowdown in business investment), government spending stalled, and trade turned into a drag on the economy — as the global financial crisis hurt exports, dumped cheap foreign goods in U.S. markets, and contributed to the loss of 250,000 manufacturing jobs.

These troubling trends suggest that the economy may suddenly stall unless public policymakers look under the economy’s hood and start tinkering before it’s too late. Government at every level needs to do more than rack up surpluses. It needs to invest in people and communities in order to sustain economic growth in the short term and enhance our nation’s productivity in the long term.

And that’s not all. The Federal Reserve Board needs to keep holding down interest rates, so that consumer debt won’t push hard pressed households off a financial cliff. American negotiators need to take action against unfair practices by our trading partners — particularly China, Japan and Russia — which are dumping steel and other products into our markets and costing jobs. Congress should also raise the minimum wage, so that the lowest-paid workers can continue to afford the necessities and contribute to the consumer-led boom.

The American economy, boosted by consumer confidence, continues to hum along in top gear. In the upcoming months, we may not be so lucky — unless our policymakers can learn to steer around the obstacles that lie ahead.


Eileen Appelbaum is EPI’s research director. She specializes in labor markets.

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