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Re: Recession and consumer spending

Sphairon — Sat, 22 Nov 2008 15:23:10 GMT

Thanks all, I think I see my mistake now.

Re: Recession and consumer spending

krazy kaju — Sat, 22 Nov 2008 04:12:05 GMT

MatthewWilliam:
Sounds good, do you have a link that goes into depth about this. The ABCT is usually all about doom, not recovery.

I have a link for the Walmart info, but none for the ABCT info. It's basic logic: if certain investments that are made during the boom period are unsustainable, then the economy cannot recover until they are liquidated. This means that the workers working on those investment projects need to go unemployed and that wages need to fall in order to accomodate these new workers and to reemploy them.

Re: Recession and consumer spending

Stranger — Sat, 22 Nov 2008 03:40:18 GMT

"People" in general do not stop consuming in recessions. People whose industries have collapsed shrink their consumption, but people who were in good industries are unaffected. They will however reduce their consumption of long-term durable goods that must be financed with credit, such as houses and cars, because the cost of borrowing has gone up. The consumption of food will not be affected, since that is not financed consumption. The food industry is going to make it out fine and the people in it will continue business as usual. They may even find their standard of living increase from price deflation. The cars and houses industries won't.

Re: Recession and consumer spending

Bostwick — Sat, 22 Nov 2008 02:53:16 GMT

Sphairon:

As soon as a recession starts, consumer behavior shifts towards saving rather than spending. This obviously hurts producers, they can't sell as much anymore. People lose their jobs. Unemployed people do not consume as much either, this in turn makes other people lose their jobs and so on.

Its not that this process somehow "runs its course", its that it never happens. Reality doesn't work like the picture you painted.

People don't "save" during a recession, they consume their savings because their income has dropped. People spend their money more carefully because they have no other choice.

Re: Recession and consumer spending

Klor — Sat, 22 Nov 2008 02:39:53 GMT

My first post here, and after lurking here a few weeks, I've learned a lot. Here's my shot at putting together some of the things I've learned... correct me if I'm wrong on anything.

Now, basically what krazy kaju said. I'll try to expand the answer a little bit more. The initial response to a a recession usually involves laying off some employees and keeping what you need to continue to function normally, or as close to normal as it is possible. Obviously, that saves some money. When corporations have a lot invested into a market area that has lost customer interest (whatever the reason), those investments become worth considerably less. To continue to fund them would prolong the current problem. Therefore, as the assets are liquidated, more focus can be put upon the products that have a high demand, and less upon the unsound investments. As supply begins to meet demand, the economy will begin to re-stabilize and jobs will open back up.

I believe saving would happen in a recession like this due to low supply, which would require more savings for the goods that would want. While savings will always enter back into the economy somehow, I believe it would begin to occur in a greater way as prices dropped while supply rose to meet demand, and as jobs opened back up, allowing for a higher household income overall.

The cycle has to stop eventually. If it did not, eventually there would be no jobs left, and the market would just reset from square one. As problems seem to occur in one respect to the market, things are usually pushing forward in another area, creating a balance, although the balance may not instantaneously occur.

Re: Recession and consumer spending

MatthewWilliam — Sat, 22 Nov 2008 02:24:00 GMT

krazy kaju:

The turning point is when unsound investments are liquidated and when wages fall enough to employ the unemployed. Speaking of which, Walmart is expecting to make a good profit this Christmas season. Why? Because they've fought unions tooth and nail. Seemingly, wage flexibility wins the day.

Sounds good, do you have a link that goes into depth about this. The ABCT is usually all about doom, not recovery.

Re: Recession and consumer spending

krazy kaju — Sat, 22 Nov 2008 02:11:15 GMT

The turning point is when unsound investments are liquidated and when wages fall enough to employ the unemployed. Speaking of which, Walmart is expecting to make a good profit this Christmas season. Why? Because they've fought unions tooth and nail. Seemingly, wage flexibility wins the day.

Re: Recession and consumer spending

kiba — Sat, 22 Nov 2008 01:54:45 GMT

Because they will choose to spend their saving at some point in the future? Or saving become investment in new entreprises?

Recession and consumer spending

Sphairon — Sat, 22 Nov 2008 01:44:41 GMT

I'm sure the answer to this is quite simple, but it always gets complicated when I try to figure it out:

As soon as a recession starts, consumer behavior shifts towards saving rather than spending. This obviously hurts producers, they can't sell as much anymore. People lose their jobs. Unemployed people do not consume as much either, this in turn makes other people lose their jobs and so on.

But where's the turning point that enables recovery? Isn't that an infinite downwards spiral, and if not, why does the chain reaction suddenly stop?