...the long-feared capitulation of American consumers has arrived. According to Thursday's GDP report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.
To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn't been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.
Also, these numbers are from the third quarter -- the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.
So this looks like the beginning of a big change in consumer behavior. And it couldn't have come at a worse time.
It's true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent -- sometimes it has even been negative -- and consumer debt has risen to 98 percent of GDP, twice its level a quarter-century ago.....
....Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate...For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap....
....The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone's income.....
....if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment....
.....For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It's true that Ben Bernanke hasn't yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it's hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.
The capitulation of the American consumer, then, is coming at a particularly bad time. What we need is a policy response.....
http://www.startribune.com/opinion/c...D3aPc:_Yyc:aUU
