Consumer Spending to Fall as Households Shed Debt, Says San Francisco Federal Reserve

In a just-released study, researchers at the San Francisco Federal Reserve say that the nation may be in for a "substantial and prolonged slowdown in consumer spending" as households get rid of excessive debt. (Consumer spending is 70% of the economy.) In the mid-1980s, household debt was 65% of spendable income. By 2007, that had more than doubled to 133%. The combination of higher debt and lower savings boosted consumer spending, allowing the economy to grow abnormally rapidly. "In the long run, however, consumption cannot grow faster than income," say the researchers. Debt is now down to 130% of income, and the savings rate has gone up from about zero. This could continue over the next decade and dent economic growth significantly, say the researchers.

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