September 12, 2011

5 Reasons Consumer Spending Isn’t Growing

Even though Fed Chairman Ben Bernanke is reportedly puzzled by weak consumer spending over the last two years, there are five reasons why he shouldn’t be.

First off, American households lost $7.4 trillion in equity on their homes from the peak of the housing bubble to recently. When consumers lose $7.4 trillion, that’s a pretty good reason for consumer spending not to grow very fast.

Second, house prices have flat-lined in many areas of the country (with some growing and some losing ground) and there isn’t a plethora of equity extraction available to jumpstart consumer expenditures.

The struggling housing market is not the only reason for poor consumer spending in the two years since the recession ended, though.

Households also continue to deleverage, meaning that they are paying down consumer credit and other debts and taking on less new debt.

Furthermore, unlike some other countries (Japan for example), American households progressively saved less and less over the years, consuming (and borrowing) more and more. And finally, another reason for slow consumer expenditure growth is the unemployment rate at 9.1%.