Is Depression Holding Back Household Spending?

Households have tightened up spending and are behaving in a way as if the economy was even worse than it actually is, say economists.

Economic growth continues to fall short of expectations and Federal Reserve Chairman Ben Bernanke, speaking at a luncheon in Minneapolis on Thursday, suggested that it may partially be because the public is depressed.

Americans are facing high levels of unemployment, slow gains in wages for the employed, falling home prices, and debt burdens. However, “even taking into account the many financial pressures they face, households seem exceptionally cautious,” Bernanke said at the luncheon.

While the economy has grown slowly this year, consumer confidence remains low. In fact, the latest consumer sentiment readings are near all-time lows, which were last seen in late 2008 during the financial crisis, John Williams, the president of the Federal Reserve Bank of San Francisco, recently told the Seattle Rotary Club. “People are on edge waiting for the other shoe to drop.”

Source: “Fed Chief Describes Consumers as Too Bleak,” The New York Times (Sept. 8, 2011)