Spending Less? You're Helping Slow the Economy
Conserving her family's cash as costs rise, Riverside resident Laureen Pittman is postponing vacations, home repairs and other big purchases. For necessities, she is increasingly relying on discount retailers, shopping at Costco instead of Ralphs and Marshalls instead of Nordstrom.
Belt-tightening by consumers like Pittman is a key reason the U.S. economy is slowing. Inflation-adjusted economic growth fell to a surprisingly sluggish 2.5% in the second quarter from 5.6% in the previous three months, largely because of slower consumer spending, the Commerce Department reported Friday.
The economy's latest growth rate was below the expected 3%, which is average for an economic expansion. It triggered a rally in stock and bond markets as investors boosted their expectations that the Federal Reserve will soon halt its anti-inflation campaign to raise interest rates.
Consumers -- accustomed in recent years to spending more than they earn, saving little and tapping home equity to pay the bills -- have clearly been hit by $3-plus gasoline prices. Whether that and other worries prompt consumers to scale back even more will largely determine whether the economy can maintain a slower but steady "soft landing" or veer toward recession, economists say.
But today's consumers -- whose spending accounts for two-thirds of growth -- are increasingly resilient, able to maintain their standard of living thanks to the global economy, experts say. Such globalization has a dual effect: Although cheap labor abroad suppresses wages, it also provides consumers with low-cost goods, keeping U.S. inflation down.
"Without that international globalization, the consumer would probably be hit with an even bigger squeeze between income and outcome," said Ken Goldstein, an economist at the Conference Board, a New York business research organization.
Consumers also are protected by a more stable job market. Employers are trying to increase efficiency with more technology and fewer new hires than in past expansions, leading to fewer job cutbacks.
Any recession now is likely to be milder than those in the past, because many manufacturing jobs -- once the most volatile part of the economy -- have been outsourced, removing the possibility of massive layoffs that sparked severe recessions, said Edward Leamer, director of the UCLA Anderson Forecast.
