American Consumer to Labor Market: More Gains Please

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In the fourth-quarter, the American consumer managed to spend more money without earning more money — or, at least, they spent money faster than they earned it. According to the U.S. Bureau of Economic Analysis, real disposable personal income — what people have left to spend after taxes and inflation, chained 2009 dollars — declined by 0.2 percent in December. Meanwhile, personal consumption expenditures increased 0.2 percent on the same basis. Using current dollars, real disposable personal income was flat, and personal consumption expenditures increased 0.4 percent. At the the individual level, the net effect of this spending pattern was higher debt and smaller savings accounts.

But still, while the American consumer may find himself or herself with higher debt and a slimmers savings account, the greater spending was a boon for the economy. Everyday private-sector activity drove the economy forward despite the macro-level problems currently facing the nation. A 3.3 percent increase in real personal consumption expenditures in the fourth-quarter drove overall gross domestic product growth for the period. Consumer spending — uninspired by any meaningful increase in income — offset a 12.6 percent decrease in government spending in the fourth-quarter to push annual GDP growth to 3.2 percent for the period.

Strong consumer spending is essential for the recovery of the American economy. Consumer spending accounts for approximately 70 percent of gross domestic product in the United States, and because government and business spending largely remained weak in 2013, the economy depended even more on household spending to fuel growth. For economists, the all-important question is where the consumer spending trajectory is headed this year.

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