Pulling In Our Horns

The Wall Street Journal has an interesting article on middle-class spending in the past few years.  Department of Labor statistics show that middle-class Americans cut their spending by 3.5 percent from 2008 to 2009, the steepest one-year decline in spending since such records began being kept in 1984.  Spending by the richest Americans also declined by 2.6 percent from 2007 to 2009.  The statistics show that reduced discretionary spending produced the decline, with people shelling out less on things like alcohol and eating out.

These statistics aren’t a surprise to anyone in middle America.  The ongoing recession — only economists believe it ended months ago — has truly shaken the confidence of the American consumer.  In the past, spending by optimistic Americans pulled the country out of recession.  In this instance, that is not happening because there is too much uncertainty.  No one knows whether their taxes will be increased, or whether another round of layoffs may hit their workplace, or whether a desperate family member will come to them asking for help.  In such circumstances, the only prudent course is to cut back on non-essentials and try to make do.

This may be why the current recession is baffling economists whose models predicted a rebound in consumer spending.  Most Americans may be optimists, but they aren’t crazy.  They will adopt a careful wait-and-see attitude about whether there is real economic recovery before the purse strings are loosened again.