Consumer Spending Doesn’t Drive the Economy

“Consumer spending makes up more than 70 percent of the economy, and it usually drives growth during economic recoveries.”–“Consumers Give Boost to Economy,” New York Times, May 1

The truth is that consumer spending does not account for 70 percent of economic activity and is not the mainstay of the U. S. economy. Investment is! Business spending on capital goods, new technology, entrepreneurship, and productivity are more significant than consumer spending in sustaining the economy and a higher standard of living. In the business cycle, production and investment lead the economy into and out a recession; retail demand is the most stable component of economic activity...

Thus the truth is just the opposite: Consumer spending is the effect, not the cause, of a productive healthy economy...

This truth prevails in the marketplace: It’s supply — not demand — that drives the economy. Savings, productivity, and technological advances are the keys to economic growth. This principle was discovered and developed by the brilliant French economist Jean-Baptiste Say in the early nineteenth century and is known as Say’s law. In fact, he invented the word “entrepreneur” to describe the primary catalyst of economic performance...

In reality, increased savings can actually stimulate the economy, even if consumer spending is anemic. A recent study by the St. Louis Fed concluded that in the short run, “a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters” (Daniel L. Thornton, “Personal Saving and Economic Growth,” Economic Synopses, St. Louis Fed, December 17, 2009).
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