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Consumer spending is on the right track




As a supply-sider I tend to ignore consumer spending, since I think the major drivers of growth can instead be found on the "supply-side" of the economy: e.g., jobs, hours worked, capital spending, and industrial production. Normally, you can't have an increase in spending without first having an increase in jobs and production. But this recession/recovery cycle has been a bit different from the norm, since it was largely panic-induced. Fears of a global financial meltdown caused consumers everywhere to shut their wallets in an attempt to boost their holdings of cash. A massive increase in the public's demand for money caused a dramatic and sudden decline in spending. As I've been documenting over most of the past year, the level of panic has gradually subsided, confidence is slowly returning, and money that was hoarded is beginning to be spent. So an increase in spending is a good sign, this time, that the outlook for the economy is improving. With spending up, jobs are likely to follow.

The chart above is just one more example of how spending has come back to life. The decline in real consumption spending was quite pronounced, and while the rebound was not sudden and sharp, the recovery pattern we are seeing is not greatly different from what we have seen in other modern-day business cycles.

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