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The economy rebounds as consumers save more, spend less

Wednesday, May 18, 2011 - 00:00

CHICAGO — There is a paradox in today’s recovering economy, and it is affecting your business whether you realize it or not. In fact, you might notice it more in your household.

William Strauss, senior economist and economic advisor, Federal Reserve Bank of Chicago, describes the dichotomy of today’s consumers saving vs. spending the Paradox of Thrift, and it’s affecting today’s economy. He explained the pattern at the 2011 Global Automotive Aftermarket Symposium (GAAS) on Wednesday morning.

Consumer savings have increased quite markedly in recent years, Strauss says. However, while more money being saved can lead to better interest rates, which does take time, that means consumers are spending less. And because consumers represent two-thirds of gross domestic product (GDP), that’s a bad thing for the economy.

Taking a look at what these consumers are spending their money on, it sheds a light on the argument against high gas prices — and thus money for other services and products. Strauss told GAAS attendees that about 6.3 cents per every dollar spent is spent on energy goods and services. That includes gasoline and home energy costs. This is equivalent the long-term average during the last 50 years.

“While we might complain about it, I don’t think this is going to be a challenge of a risk of recession, certainly not at the levels we’re talking about,” he says. He later added, “Oftentimes the cure for high gasoline prices is high gasoline prices. There’s a demand side to this and the demand curve does slope down.”

In fact, he says the demand is changing: 2010 gasoline prices were 21.6 percent higher and gasoline sales were 10.3 percent lower than in 2009.

 

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