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Reliance on consumers unhealthy?

NEW YORK — No pressure, but the economy's health rests on your shoulders.

The economists who know you as "The Consumer" are worried that you're buying less. Fewer cars, fewer engagement rings, fewer winter coats. Instead, you seem to be doing what your mother told you to do long ago: saving.

That sounds sensible, and it is. The problem is that consumer spending makes up 70 percent of the economy. When enough people shut their wallets, the whole economy shudders.

Consumer spending dropped 1 percent in October, the fifth month of decline in real spending, which leaves out the effects of inflation.

As the holiday season begins, the question is: Does the country's dependence on consumers make it more vulnerable than it would be if the economy had a different engine?

Here are some questions and answers about consumer spending and the economy.

Has consumer spending always been this large a part of the economy?

The rate has wavered. In 1929, the year the Great Depression began, consumer spending was nearly 75 percent of the nation's economy, a share that grew to 83 percent in 1932 as business spending shrank.

Conversely, as government spending increased toward the end of World War II in 1943 and 1944, consumer spending fell to half the total gross domestic product, the widest measure of the economy.

Consumer spending has been edging higher as a portion of the total economy intermittently over the last 25 years, helped by easy credit.

What drives other economies?

In many of the largest industrialized countries — Germany, France, Italy and Britain — government spending makes up a larger share of the economy.

Free-market advocates have argued that those countries' dependence on government spending makes their economies less nimble. On the other hand, those who argue for higher taxes and a broader safety net say the health care and other services many of those countries provide their citizens add to their economies in ways that can't easily be measured.

Will the government bailouts tilt the balance of the economy away from the consumer and toward the government?

That will depend on how much the government spends and how much the consumer saves.

The federal government has committed more than $7-trillion in its effort to contain the financial crisis — although there's widespread agreement it won't really spend anything close to that figure.

For October, personal savings as a percent of income was 2.4 percent, up from 1 percent in September. But that number may be misleading. If too much of our spending is financed by borrowing, selling investments or using savings from previous periods, our savings rate could look better than it really is.

Reliance on consumers unhealthy? 11/28/08 [Last modified: Thursday, November 4, 2010 10:35am]

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