Network News

X My Profile
View More Activity
2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Is the Contraction Underway?

Economist Milton Friedman called the Great Depression the "Great Contraction." For him, it was a more apt term that better described what happens in a financial crisis -- businesses and consumers being contracting, or reducing spending by getting smaller.

Businesses not only hold off expansion plans, but they also begin doing things like trimming part-time payroll hours and carrying out other pre-emptive moves designed to keep the business afloat during a coming spell of tough times.

Consumers cut back spending. More than two-thirds of the U.S. economy is based on consumer spending, so you can see the snowball effect.

This morning, the federal government reported that retail sales plunged in September by 1.2 percent last month. That figure is almost double the 0.7 percent drop analysts had expected.

Aside from driving down market futures before today's opening bell on Wall Street, that figure means that U.S. consumers are cutting spending, either because they're earning less money or because they anticipate they will be soon.

It may be the same reason that the tech-heavy Nasdaq has dropped so much over the past three months. Tech companies -- such as Apple, Microsoft and others that make gadgets and products -- rely on consumer spending. People may be putting off upgrading their home computer or buying another iPod.

And with holiday sales providing a big chunk of a retailer's revenue, it could be a bleak December looming.

-- Frank Ahrens

By Frank Ahrens  |  October 15, 2008; 9:31 AM ET
Categories:  The Ticker  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Oct. 16, 2008
Next: Wall Street Dives Out of Gates

Comments

A homeless guy said collect lots of newspaper because they don't make it with same old heavy stuff as they used to. You need more of it to cover up and stay warm. I guess all you can do is print more papers. They can't keep printing more money because they'll go broke just paying for the ink and paper while making the money worth less in the process. Keep pinching pennies and be prepared for the worst. It looks like it's ahead. If you are rich you are all set, so the middle class gets victimized and poverty grows thanks to Paulson and company. Gas came down again, so that's a break. If food starts coming down, it's better. Good luck Post.

Posted by: Beau James | October 15, 1908 9:56 AM | Report abuse

You are right on here, Frank. But I was actually quite surprised when I went shopping over the holiday weekend- There weren't any parking spaces left at the mall; people were pulled up on the grass and in the devlivery areas. But my fears of a Great Contraction reappeared when every single thing in the stores was on sale by at least 50%.
Found a great article that shows the recent movement of most major sector ETFs: consumer staples, discretionary, real estate, etc. are all hurting.
http://www.greenfaucet.com/technical-analysis/something-just-isnt-right/25039

Posted by: Graham | October 15, 1908 9:59 AM | Report abuse

Here are big expenses.
Cause of Death: 9/11 related illness
Date of Incident: Tuesday, September 11, 2001
Weapon Used: Aircraft; Passenger jet
Suspect Info: 19 suicide attackers
We can't afford to go broke. You have to make more money because the long-term expenses will be large. In other words, the economy must expand to meet the demands of the expenses or we just keep getting killed all over again. Keep oil going down to win. It's a food fight. We have kids to feed and we have to keep things going forward. Lower expenses, raise profits or go under.

--------

Posted by: Beau James | October 15, 1908 10:18 AM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company