High Unemployment Will Dampen Consumer Spending - Prolonging Deflation

Personal spending accounts for 70 percent of the economy.

But a new Bloomberg survey finds that high unemployment will dampen consumer spending:

Surging unemployment in the U.S. will delay a recovery in consumer spending and mute the rebound when it does materialize.

Fewer jobs, lower home values, limited credit and shrinking retirement funds will prompt Americans to save, blunting the Obama administration’s stimulus efforts. Still, government infrastructure projects, smaller stockpiles and stabilization in residential construction will help the economy start growing in the second half of this year.

“Consumer spending will come back grudgingly, slowly,” said [the] chief economist at Moody’s Capital Markets Group in New York. “The unemployment rate should continue to rise and remain stubbornly high.” ...

“Consumer spending does look to be more muted in this recovery than typically after a deep recession,” said [the] chief U.S. economist at Barclays Capital Inc. in New York. “We would attribute that to the negative wealth effects from housing and stock market declines. There will only be a modest rebound in the next couple of quarters.”

The world’s largest economy will contract at a 2 percent pace this quarter, before growing 0.5 percent in the July-to- September period and 1.9 percent in the final three months of the year, according to the survey. For all of 2009, the economy will contract 2.7 percent, the biggest drop in the post-World War II era...

Already, the economy has lost 6 million jobs since the recession began in December 2007, the most of any slump since the Great Depression. That’s nearly double the 3.5 million jobs President Obama seeks to save or create with the $787 billion recovery plan passed in February.

While there are many arguments for runaway inflation in the near future, dampened consumer spending argues for continuing deflation.