Chart of the Day: How Slower Consumer Spending Stifles GDP

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The American consumer drives the U.S. economy. Consumer spending generally makes up around 70% of the nation's GDP. So when spending grows, the nation grows. But when spending slows, so does overall growth. Unfortunately, spending growth wasn't as strong in the first quarter of 2011 as it was in the final quarter of 2010. That's one of the big reasons why the U.S. economy grew at a weak rate of just 1.8%.

Due to the major role consumer spending plays in the U.S. economy, it's one of the most important components of GDP to monitor. Here's how it has increased or declined over the past several years. GDP is also included for comparison:

spending v gdp 2011-Q1.png

As you can see, the rates of change of these components don't always match up. The big outlier is the fourth quarter of 2009. GDP growth soared while consumer spending growth actually declined a bit. Obviously, there are other components affecting GDP besides just consumer spending. In that quarter, exports and business spending drove GDP growth higher.

But there's one pretty interesting observation to make here. At no point over this six-year period has consumer spending fallen without GDP also falling. So as consumer spending growth slows, there's reason to worry about overall GDP. If weakening economic confidence is causing Americans to grip their wallets a little more tightly, then GDP growth will likely begin to contract.

The good news, however, is that consumer spending growth wasn't really all that weak in the first quarter. At the quarterly annualized growth rate of 2.7%, that's still the second strongest rate of growth since the fourth quarter of 2006 -- before the recession began. Considering that gas prices rose significantly during the quarter, the resilience of consumer spending looks even more impressive. So the nation's economic growth may have slowed, but the American consumer doesn't appear to be pulling back much just yet.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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