Recent Spending Patterns Bode Poorly for the Economy in 2012

Libby Kane
Posted

Talk about adding to post-holiday depression:

The New York Times reports that despite high hopes for consumer spending in the United States during the holiday season, the reality was underwhelming. And that has them worrying that lackluster spending patterns will carry over into 2012, neglecting to give our economy the jolt it needs.

So what happened? Muted spending in 2011 forced retailers into further markdowns in the week before Christmas. Analysts expected an increase of about 3.3% in holiday profits since December 2010, and the actual increase was 3.4%—slightly higher than expected, but still unimpressive. In fact, people only shopped when there were huge discounts, which is why several large retailers such as Target, Kohl’s and J.C. Penney are lowering their fourth-quarter profit projections.

The lack of spending during the holiday season is setting off alarm bells for American economists (although by now, the bells are just a part of the U.S. soundscape).

But really, why should we care about how many people are buying sweaters?

Shopping’s Connection to the Wider Economy

The American economy is based on consumer spending—the oft-cited figure is that consumer spending makes up a whopping 70% of our economy, bending overall growth to its whims. So while the holiday sales figures of major retailers won’t make or break the bank, they do show what’s up in the world of consumer spending, and that in turn influences the key measure of any economy: growth rate.

The economic growth rate, also known as the GDP growth rate, is a way to measure the economic health of a country. In a developed country such as the U.S., growth between 2% and 4% is considered stable, below that is a problem, and over 5% is considered too fast to be sustainable in the long term.

And while the percentages, released quarterly and annually by the Bureau of Economic Analysis, might seem like just another figure, they impact everyone: Falling growth rates for two consecutive quarters indicate a recession.

Forecasting company Macroenconomic Advisers, as quoted in the Times, predicts that the first half of this year will see economic growth of about 2%, as compared to the 3.6% growth seen at the end of 2011—which was the fastest growth in nearly two years.

This is not to say that a growth rate below 2% would be a complete disaster. Countries with high standards of living, such as Japan, have survived extended periods of slow growth successfully in the past without immediate impact on its citizens, and it’s expected that the U.S. could do the same. A low, stable rate of growth is disappointing, but not alarming like a growth rate that falls steadily.

Every Consumer Counts

Our economy’s dependence on consumer spending makes us different from countries like Germany and Sweden, whose economies don’t depend so much on what their consumers will shell out. For that reason, they have been able to remain relatively stable with a high rate of consumer saving. But because in our country, we rely so heavily on consumers, and because our “spending” is often more like “borrowing” since we use money we don’t actually have, we’ve gotten ourselves into quite the pickle (more on that here).

That’s why retailers are fighting so hard for the little money we do have. Much like holiday shopping figures are indicative of larger patterns, so too do smaller efforts indicate larger needs. For instance, despite (or because of) the economy, advertisers are shelling out a record-breaking $3.5 million for a 30-second advertising slot during the 2012 Super Bowl. Will buying the advertised candy bar save the economy? Probably not. But those ads are about easing consumers into spending on a national scale … which might actually make a difference.

But hold on. Running out to buy a case of candy bars and encouraging your Facebook friends to do the same won’t get you anything but a sugar high. We, as citizens, can’t necessarily fix the economy ourselves. And, in any case, you’re always better suited by mastering what you can control: establishing and maintaining a budget, saving for your biggest goals and spending responsibly in pursuit of your richest life.

In other words, set an example by being financially responsible and wait for it to catch on.

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