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In a CNN Money article:

People’s views have a greater effect on the economy these days since consumers are more likely to act on their feelings, experts said. So if they are worried about their financial well-being, they’ll be more likely to pull back on their spending. This, in turn, hurts the economy.

“If there is a bit of a dark cloud, the impact on the real economy is bigger than it was in 2001,” said Michael Rizzo, economics professor at the University of Rochester. “Whether justified or not, expectations matter. It puts a brake on the economy.” 

I am not the expert to say that consumers are more or less likely to act on their feelings. What I do believe is that the impact of expectations on the real economy might be greater today than in recent years. It’s not because I think there has been a sea-change in economic behavior, but rather that the growth of access to information has enabled more people to form expectations, and my personal sense is that this has generated greater momentum swings in both the positive and negative directions. So, if people now convince themselves that house prices will fall forever, then this expectation may induce potential buyers to sit tight until something changes to alter these expectations.

For the record, I do not believe that spending is an important indicator at all – for two reasons. First, spending is at best a barometer for how well and how much “we” are producing. Spending does not drive the economy, production does. You cannot spend unless there are goods and services to spend it on. This is a major issue I have with the way GDP accounts are presented. Second, if all Americans wish to spend less, because spending less makes them happier, how is that a problem? If this non-spending happens in an environment where people wish to spend more in the future, then this non-spending will be translated into saving, investment and future spending opportunities that are more favorable than today’s. If this non-spending happens in an environment where people wish to permanently spend at a lower level, then there will be a reduction in overall economic activity – today and tomorrow. But this is what the people wanted. We are willing to exchange the purchase of goods and services for more leisure time. If this is a choice individuals are freely making, how can that be a bad thing?

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