About 70% of the US economy is driven by consumer spending. Now how much consumer's spend is dependant on a large number of factors. We have seen major expansion in spending in this country based upon an increase in debt.
Spending can only consist of immediate or differed payments. It is fairly safe to say that there was a revolution in this country based on the wide availability of credit which allowed people to consume now and pay later.
It can make sense to finance certain purchases, if the payments extend over the useful life of the item. If you need a car and don't have enough available cash to simply buy one, making payments for 3-4 or 5 years may be your only option. Similarly, buying a house also would most likely need to be financed.
As you look at various items that you can finance, the advisability of using credit depends on the long term value of the item. Financing an education that will increase your earning potential is probably a good investment. Financing a hot tub might not be.
As credit has become more difficult to obtain, many of the items that American used to buy on credit have been hit quite hard. This is also related to the decline in home equity which used to provide opportunities for many Americans to finance purchases, or pay down other types of debt.
Spending decisions are made based on many factors and as consumers lose confidence in the future, they tend to either stretch out purchases or wait until prices fall. This results in a reduction in demand that can be persistent. Consider a decision to buy a car. Many Americans liked to trade in their car every few years in order to have a new model and avoid potential maintenance problems. As the economy declined and confidence waned, many of these same individuals decided to differ or postpone that car purchase. So if you used to buy or lease a new car every three years, but add a year onto that cycle, the number of new cars sold every year will decrease by a significant amount.
This reduced demand can be offset by price reductions, think about the clunker program, but the only way to really reverse it would be to restore consumer confidence and credit.
We are not going to do that so easily, which is why the contraction in the economy is not going to disappear quickly. However, barring any other sudden jolts, it has finished contracting and will grow in what may very well be a more sustainable way.
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