Consumer spending dropped at a 3.5 percent annual pace in the fourth quarter after decreasing at a 3.8 percent pace in the previous three months, the Commerce Department said Jan. 30. It was the first time since records began in 1947 that declines in spending exceeded 3 percent in consecutive quarters. The economy shrank 3.8 percent, the most since 1982.
The article also noted that the decrease in spending has pushed up the personal savings rate a bit. The way to look at this is that the economy is transitioning from an unsustainable debt-driven level of consumer spending to a new, lower baseline in which growth has more to do with income and less to do with debt.
We’re going to be a smaller economy, at least for a number of years. Federal stimulus can soften the impact of this transition, but it can’t prevent it.
Topics: Economy
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