From the early 1990s until the recent financial crisis, U.S. consumer spending rose faster than income, buoyed by easy credit conditions, the wealth effects of rising house prices and returns from financial markets. However, the erosion of housing and financial-sector wealth driven by the financial crisis that began in 2007, and the millions of job losses resulting from the ensuing recession brought about a severe retrenchment in consumer spending. The fiscal stimulus package, including initiatives like the “cash for clunkers” program, helped to boost consumer spending in 2009. However, as the effects of the stimulus support fade, protracted weakness in the labor market, reduced consumer credit availability and a possible climb in the savings rate as households attempt to deleverage and increase their net worth are likely to dampen a self-sustained recovery. Given that consumption accounts for around 70% of U.S. GDP, slow consumption growth has huge implications for the wider economy, as well as the global recovery.
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