By Katherine Lewis
Washington (RushPRnews)12/05/08â€” Goods and services purchased by Americans make up one-fifth of the global economy, but the third quarter of 2008 saw the largest drop in consumer spending since 1980. As the financial-market turbulence prompts U.S. households to cut back spending, economies around the globe feel repercussions.
â€œThe U.S. consumer is a voracious consumer of goods and services,â€ said Scott Talbott, a senior vice president at the Financial Services Roundtable, which represents large financial institutions. â€œWe [are] at the heart of the recession. Thatâ€™s why weâ€™re going to have to be at the heart of the recovery.â€
Historically, Americans have spent a greater share of gross domestic product (GDP) â€” a measure of a nationâ€™s economic size â€” than citizens of other countries have. Those expenditures translate into jobs and economic growth around the world.
Over the last 15 years, U.S. household spending climbed dramatically and savings declined, raising concern among policy makers and economists that the situation was unsustainable â€” even as the world was becoming more dependent on U.S. pocketbooks.
U.S. consumer spending grew to $9.7 trillion in 2007, a whopping 70 percent of U.S. GDP, according to the Organisation for Economic Co-operation and Development (OECD). That amounts to 18 percent of the gross world product, which was $54.6 trillion in 2007 according to the CIAâ€™s World Fact Book.
The problem with the recent dramatic growth in consumer spending is that people borrowed against their houses, which were climbing in value by 14 percent each year earlier this decade. The real estate collapse ended that run of easy money.
â€œTwo-thirds of that borrowing, at least, came out of homes,â€ financial analyst Charles Morris told America.gov. â€œIt was the number one supporter of consumer spending. Thatâ€™s just over now.â€
American consumption should probably ratchet back to 63 percent of U.S. GDP, in order for household savings to build to a healthy level, according to Morris, who authored The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash.
The U.S. economy has been in recession since December 2007, according to the National Bureau of Economic Research.
Line of consumers handles cameras on display (AP Images)
In Virginia, shoppers look at cameras in a Circuit City store on the first shopping day after Thanksgiving, November 28.
â€œThis will probably be the worst recession in the post-World War II period,â€ said Gus Faucher, director of macroeconomics at Moodyâ€™s Economy.com in West Chester, Pennsylvania. â€œRecessions result from imbalances in the economy, and then we correct those imbalances and we come back out. â€¦ We are going to see the savings rate increase as consumers more closely balance their income and spending.â€
At 0.4 percent for 2007, the U.S. savings rate is the lowest in the world. It compares to 2.9 percent in the United Kingdom, 3.1 percent in Japan, 6.8 percent in Italy, 10.9 percent in Germany, 12.7 percent in France, 24 percent in China and 28 percent in India, according to a Financial Services Roundtable analysis of OECD data.
Americans consume more than citizens of other countries for a number of reasons.
â€œItâ€™s partly cultural, but itâ€™s also a reflection of tax policy,â€ said David Cross, president of business consultant Market Outlook. â€œYou have much higher marginal tax rates in Germany, which discourages spending. There are issues of how much you can consume given the size of your home.â€
The U.S. government gives a tax deduction for interest payments on home mortgages, which encourages people to buy larger houses and fill them with more possessions. The lower cost of gasoline in the United States boosts car sales, especially large cars, trucks and sport utility vehicles.
Americans also spend more on medical services than in Europe, where health care is heavily subsidized, Cross told America.gov.
Moreover, the U.S. market simply contains more products and services. For instance, the Chinese donâ€™t have access to insurance products, so they tend to self-insure â€” one reason the savings rate is so high.
â€œConsumer attitudes toward spending and saving are very difficult to change,â€ Cross said.
Indeed, U.S. policy makers donâ€™t want consumer spending to drop too quickly. They want to avoid the kind of economic stagnation Japan experienced during the 1990s, when people were overly reluctant to spend.
â€œThis is uncharted territory,â€ the roundtableâ€™s Talbott said. â€œIf consumers donâ€™t spend at all, then we go into a worse recession. â€¦ We have to start saving a little more but continue to spend.â€
To that end, the U.S. government in November committed as much as $800 billion to revitalize the banking system and encourage loans for education, cars and real estate.
President-elect Barack Obama has set a goal of creating or preserving 2.5 million jobs over three years, and Democratic lawmakers are pushing an economic recovery package that could exceed $500 billion.
At the recent financial summit in Washington, leaders of the G20 nations agreed to take steps to stimulate consumer spending in their home countries. The worldâ€™s largest economies plan to work together to stave off a global recession and to reform the world financial system.