Thursday, October 30, 2008

Two thirds of the economy

Consumer spending represents two thirds of US economic activity. Reuters reports today that the US Commerce Department's estimation of the economy shows we the people tightened our belts considerably in the past quarter:
Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter -- the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods -- items like food and paper products -- dropped at the sharpest rate since late 1950.
We're eating fewer pork chops and more beans, it seems. As to that new Ford F-150 pickup Bubba wants to buy, well:
Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.
A friend of mine owns a car dealership here, and I'm afraid to ask him about his business. A downturn in a business sector of a magnitude not seen in over 20 years can not be ignored. Tightened credit (an artifact of the general financial malaise in the wake of years of unregulated trades in improperly valued financial instruments) is only part of the issue here.
Continuing job losses coupled with declines in the value of stocks, other investments and housing prices have put consumers under severe stress. The GDP report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter -- the steepest since quarterly records on this component were started in 1947...
This is a prima facie case for supporting and expanding the middle class. The US economy is structured upon a foundation of middle class spending. Losing 8.7% of our buying power screws even the rich.

This is why I support Obama's tax plan.

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