American consumers are the most important factor for the U.S. economy. When consumer spending increases, the U.S. economy grows, as consumer spending accounts for 70.0% of U.S. gross domestic product (GDP). Similarly, when consumer spending pulls back, we experience an economic slowdown. For consumer spending to keep increasing, the ultimate factor—consumer income—needs to increase. Basic economics suggest that once a person earns more or has some savings, he or she spends more. Unfortunately, this is not the scenario in the U.S. economy right now. Lack of consumer spending is like an elephant in the room that no one notices. Any further pullback on consumer spending at this point could quickly lead us back into a recession. In September 2012, the real disposable income in the U.S. decreased by 0.1%. In August 2012, there was a decline of 0.3% in U.S. real disposable income. (Source: Bureau of Economic Analysis, October 29, 2012.) Meanwhile, the U.S. personal savings rate is also on the decline, down to 3.3% of disposable income in September, compared to 3.7% in August. For savings, the story doesn’t end here. Contrary to popular belief, since the beginning of the financial crisis, the personal savings rate has been falling—not a good indicator for the U.S. economy. For example, in November of 2008, the savings rate for Americans was 6.5% of their disposable income. Since that peak, savings as a percentage of real disposable income for Americans has fallen more than 49.0%! (Source: Federal Reserve Bank of St. Louis, October 29, 2012.) The chart below shows the personal savings rate for Americans since the beginning of 2008 to September of this year. You’ll note a clear decline from the peaks in mid-2008. Copyright Lombardi Publishing Corporation 2012 My skepticism about the economy boils down to this: Americans are earning and saving less, so how can I believe consumer spending is going to increase and offset the economic slowdown in the U.S. economy? What we’ve witnessed recently, I believe, is a wave of optimism for the purposes of the upcoming presidential election. After the election, it won’t take long for the Americans to once again face the country’s economic hardships. For consumer spending to pick up, we need to see the unemployment rate picking up; there has to be job growth in sectors across the economy so Americans feel confident to eventually spend more. Until the employment picture changes drastically (i.e. we go from creating 150,000 jobs a month to 250,000 or 300,000 jobs a month), the economic slowdown in the U.S. will keep accelerating. The government and the Federal Reserve have to focus on consumer spending rather than printing money and buying the “bad assets” from ... Read More