The Incredible Shrinking Economy

Dramatic declines in consumer spending coupled with a reduction in U.S. export sales have contributed to the economy’s steepest decline in twenty-five years. Statistics recently released by the Commerce Department have shown that the economy is retracting at a significantly faster rate than originally anticipated in the final quarter of 2008. The economy contracted by 6.2%, further entrenching the economy into a deeper recession as analysts predict a further decline.


Typically, consumer spending accounts for 70% of the all the economy’s activity. However, there is currently a vicious cycle where consumers are spending less and companies are reducing production and payrolls in response, further driving the decline. Higher lending standards have also hurt consumers who are judged based on their credit report scores. With the simultaneous decline of home values, fear of job loss and decline in portfolio value, the average American is spending less and saving significantly more than in the recent past. Overall financial statistics have been reduced to levels not seen since the 1976 market. Economists predict that with both consumers and businesses reducing cutting expenses, the first two quarters of 2009 will be especially unstable.

Until the Government’s efforts to stabilize the shaky banking industry and housing market take affect, consumers should try to brace themselves for unpredictable conditions. President of ClearView Economics, Ken Mayland, has stated that, “right now we’re in the period of maximum recession stress, where the big cuts are being made,”  which will contribute to the further unsteadiness and withdrawal of the economy.

All sectors of the economy relying on  consumer spending have been negatively impacted. The sharpest reduction of purchasing behavior in 28 years has affected  retailers of all types. Despite the bleak numbers, those with cash are finding this an excellent opportunity to maximize their purchasing power. Big ticket items and luxury goods that have previously been too expensive for most are being heavily discounted to drum up any type of sales business.

How has the contracting economy hurt you or your business?