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