An expert economist says we shouldn’t expect consumer spending to keep climbing as we move forward in the New Year.
Martin Feldstein, the former chairman of the Council of Economic Advisers and current member of Barack Obama’s Economic Recovery Advisory Board, recently spoke out about several economic factors on CNBC.
Feldstein believes the biggest factor that lead to a rise in consumer spending over the last half of 2010 was a decline in the savings rate. But he doubts that’s something that will continue.
Consumer spending is an extremely important part of the recovery. It powers about 70% of the nation’s economy, and it rose for five straight months in 2010, leading up to the biggest holiday shopping season in four years.
On Friday, Federal Reserve Chairman Ben Bernanke told a panel of U.S. senators that he believed a “self-sustaining” recovery was taking place.
Economists with Morgan Stanley are also quite optimistic. They think the economy will grow at a rate of around 4% in 2011 – calling that estimate “conservative.”
But Feldstein had a different opinion. Last Friday, just before the new unemployment numbers came out, he said we should really be looking at the decline in the savings rate.
“If you look at the actual numbers, the key thing that’s happened over the last six months or so has been a sharp decline in the savings rate. Households are not saving much, the savings rate used to be 6 1/4 percent, it’s a full percentage point less than that, so that adds substantially to the increase in spending over the last six months.”
Feldstein does not believe a decrease in the savings rate is a “sustainable way” to create economic growth. He points out the fact that household wealth is still 20% below where it was before the recession started. The economist believes Americans will start ramping up savings again in 2011.
Unemployment is the biggest economic problem the nation is facing. That’s because practically every other factor is tied-in to jobs. The importance of lowering unemployment is something that Feldstein and many other economists agree on. People need to stop collecting unemployment checks and start working.
When Feldstein spoke with CNBC, he hadn’t even heard the new unemployment and jobs numbers released on Friday. But he knew that even the forecast of 150,000 jobs added in December was barely enough to keep up with population growth. He called the employment picture “extremely weak.” (Note: actual number of jobs added in December was 103,000)
While everyone agrees that jobs are important, not everyone thinks the employment picture is so gloomy. An Associated Press story suggests that consumer spending is rising because more American workers feel it’s less likely they’ll get laid off.
Layoffs and firings declined to the lowest point since August of 2006. Some economists think hiring will pick up significantly in 2011, but most expect the unemployment rate to still be around 9% at the end of this year.
Last Friday, Bernanke also said it could take four or five years for the unemployment situation in the U.S. to return to the normal rate of around 6%.
Find out more about Martin Feldstein’s views on unemployment, consumer spending as well as the federal deficit by watching the video below. You’ll also find out why another economist, Laurence Meyer of Macroeconomic Advisers, disagrees with Feldstein’s point of view on the savings rate.
Kasey Steinbrinck is the lead blogger on personal finance and the economy for Check Advantage. When you order checks from Check Advantage, you’ll find hundreds of unique photography featured on Wildlife Checks as well as Flower Checks and much more! Contact Kasey if you’d like free original content for your blog or website.
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