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The Unemployment Cycle

The dangerous thing about advocating more saving and less spending, a responsible approach to personal finances, is that when the public applies this approach, the economy doesn’t move forward.

The Commerce Department released consumer data from June today showing that personal spending dropped 0.2% during that month, the biggest decline since September 2009. It took even the expert analysts by surprise, as on the whole, they were expecting an increase in spending. The savings rate (measuring savings as a percentage of income) jumped from 5.0% to 5.4% in June.

While savings has increased, banks are still getting away with offering low interest rates. For savers, who would have done better to save when rates were high and, in some cases, spend when rates are low, are taking the opposite approach. This is a saver’s dilemma, but it isn’t the only problem.

The rate of unemployment is still high. Businesses won’t hire more employees right now because:

  • employers are getting by, doing more with less;
  • employers are not convinced the economy is recovering; and,
  • employers won’t hire until their customers spend more on their products.

This isn’t true for every employer, though. My friend owns an audio-visual event production and installation business, and he’s having trouble finding a qualified salesperson to add to his team. Regardless of this fruitless search, until consumers start shifting their financial attitude towards spending and away from saving, employers will keep functioning with the resources they have. The public, though, won’t spend more until they have jobs or feel more secure in their employment.

CNN Money

Updated March 24, 2017 and originally published August 2, 2011.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 20 comments… read them below or add one }

avatar 1 Anonymous

Hey, I’m doing my part by buying ludicrous amounts of Boston Bruins Stanley Cup merchandise.

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avatar 2 skylog

with the way boston sports have been going over the last decade, and continue to look with the sox this summer…you may be the key to holding the american economy together.

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avatar 3 Anonymous

We need a WWII-style stimulus plan. Keynesianism. WWII-style stimulus, but without the war. Unfortunately, when it comes to economics, conservatives think running a country is just like balancing a personal checkbook. It’s not that simple. Krugman and Friedman at the NY Times have written about this a lot lately.

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avatar 4 lynn

I don’t see why a government budget isn’t the same. Just add a thousand more lines. I directed a federal government department and was responsible for the mulit million dollar budget. (G10) It’s not that different. But rather than reducing costs – like private business tries to do- there is an inherent percentage increase and all the money of the previous budget has to be spent or it is taken away. This is the only thing that is curious and doesn’t make sense. But there you have it.

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avatar 5 Donna Freedman

A vicious cycle, to be sure. Mr. and Ms. Citizen are worried about the economy so they stop going out to eat; if a whole bunch of them do this, their favorite restaurants lay off servers. Those servers stop getting their hair done as often and cut way back on their holiday shopping; stylists make less in tips and department store revenues suffer.
Wish I knew the answer. My only personal response is to direct my dollars toward independent businesses, which suffer more than giant chains. For example, McDonalds can probably weather the storm but a mom-and-pop restaurant might go under.

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avatar 6 Anonymous

Does anyone know what the ‘savings rate’ actually measures? For instance does it just count money stuck into a bank, or does it include investments and retirement account contributions? If it’s comprehensive like that then I’d be worried for a majority of people out there, especially with programs like social security and medicare needing to go through some drastic changes to be sustainable.

But I do recall that at some point the official numbers said that savings rate was actually negative (people were buying things on credit). So probably the growth of the economy was inflated by the fact people could overspend. We’re likely going to have to have a correction while the economy has to adjust to the fact that people are actually living within their means now.

Also I’m not entirely convinced that the ‘economy growing’ is an unilateral good. I suppose it should at least grow in proportion to the population, but do we constantly need people to be buying more and more stuff? The part of me that’s concerned about the environment and climate sees the economy as not growing as potentially a good thing.

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avatar 7 Luke Landes

The personal savings rate looks at income and all spending, and considers the rest savings. So investments are considered saving for these calculations. At times, like right before the recession, the personal savings rate was negative, so this is a substantial improvement. But it is still not great from a personal growth perspective. When the rate was negative, households were feeling quite happy with keeping wealth in real estate, which seemed to keep appreciating. Once the real estate market stopped flying, people started saving more.

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avatar 8 shellye

I see first-hand why the housing market has such influence on our economy; my husband and I have spent an enormous amount of money at places like Lowe’s, Target, Bed Bath & Beyond, etc. as we update and renovate the house we just bought. We’re probably the exception to the rule because we’ve set a good chunk of money aside just for this purpose, but just think; if home-buying were more robust, how many more people would be out spending money just like we are doing, and what that would do to stimulate jobs.

I am trying to buy local when I can; we’ve made a decision to patronize the mom & pop restaurants and shops when possible. Hmmm…Flexo, maybe you could do a story explaining the velocity of money when you shop locally? :-)

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avatar 9 lynn

Isn’t there an ad that the real estate association puts out that says ownership creates jobs? I have begun using a local business to purchase things for the house. They have free delivery.

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avatar 10 qixx

expecially since many people buy homes with an allowance to remodel part of their new home. even if this was only 5% of home sales that do this that is still a lot of money spent on home improvements alone.

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avatar 11 Anonymous

If this economy is waiting for individuals to start spending to increase demand, I think it will take a while. Until unemployment goes down and everyone feels more secure in their jobs, spending will not increase. I am more secure than most as a teacher and I tend to buy when things wear out. I still have dinner out a couple times a week, although at inexpensive restaurants.

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avatar 12 Cejay

I have been doing my part to stimulate the economy lately but that is about to stop. Rumors of layoffs make me start saving more and spending less. But my pitiful spending is not going to make a difference. But seriously, I can see why this has happened but I am not sure what the answer is.

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avatar 13 lynn

One of the answers could be that people need to feel secure in their job (those that have one)

Another could be that housing prices have to go to where they belong. I don’t think they’re there yet.

We see higher food and gas prices and this makes us unstable too.

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avatar 14 Anonymous

In the short term this fiscal responsibility is painful. However the fact that average American’s are cleaning up their own personal balance sheets is very bullish for the economy. American’s are paying off debt at record rates. It takes time to pay off debt. Once the average American feels more comfortable about their debt load or lack of one, then and only then will the economy begin to rebound. In my opinion much of this “feeling” of wealth will return with housing prices. It is housing that brought us down, and it is housing that will bring us out. Already we are seeing the signs of a national housing recovery.

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avatar 15 lynn

This is another good point.

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avatar 16 Ceecee

And some of us are tired of spending and collecting all kinds of “junk” and are now downsizing. You get to a point where you don’t own stuff, it owns you. Housing prices needed to come down, it was getting to the point where an average middle class family could not buy at the astronomical prices. It will all come back, but slowly. I agree that we should definitely patronize the mom and pop local stores. And if you have plenty, hire an out of work neighbor to cut your grass or clean your house.

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avatar 17 tigernicole86

My boyfriend and I have also been redoing our house. However, neither of us really had any furniture and there was only a fridge in the house so throw in a stove and some washer and dryer, never mind all the furniture we have to buy. I sort of giggled when I saw a Tweet by George Takeia about how shopping for wedding registries for New York would cause an economic recovery. But I have to agree. Big events like weddings and babies usually requires some big purchases. My boyfriend and I also try to go to local places here in Cleveland to enjoy some of the awesome restaurants that we have that are more expensive to be sure, but who doesn’t love local eateries that turn out gourmet fare?

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avatar 18 wylerassociate

I’ve been trying to save money, reduce credit card debt & spend less because while I’m working now it’s terrifying and sad to see what unemployed people are dealing with because none of us who are working ever have complete job security.

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avatar 19 Anonymous

The savings rate currently is still historically low and is not high. If anything I would suspect it would be higher based upon current economic conditions. I consider the current rate a “good thing” and not an indication of individuals saving too much in which then hurts the economy.

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avatar 20 Anonymous

Aaah! The great debate of “what’s good for the individual is not good for the whole”.
aka I stop buying to save money vs creating employment
aka I buy local vs the economists’ misallocation of resources (the corner greengrocer could be using their time and skills better for the long-term good of society)

Always fascinating to hear the different views…

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