Thursday, August 28, 2008

The American Economy: A House of Cards?

From an article on the economy earlier this year: "Consumers gave some of the nation's retailers a little relief in April following months of dismal sales, but business was helped along by heavy discounting that could hurt fiscal first-quarter earnings."

I've read that our economy is largely driven by consumer spending. That seems awfully fragile to me. Eventually consumers are going to wake up and realize that they no longer need a larger big screen TV or a bigger house or to slavishly change their home decor because the advertising industry declares their current look "dated". How long will consumers choose to go into personal debt to buy yet more stuff that doesn't truly make them happy?

Personal consumption has always been a large part of the economy. From the 1950s through the early 1980s it was around 63% of the GDP. In the middle 1980s it started increasing to it's current 70% number. What changed? The large increase in credit card usage and mortgage / home equity loans. We all now know the consequences of all that mortgage debt, which I've written about in other posts. Is credit card debt next?

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