In the last couple of weeks I’ve been reading many article on the slowing of consumer spending, and today I read an account on the slowing of consumer borrowing.  The business press push these reports as signs of gloom and doom.  When I heard that January sales at Macy’s had plunged 7.1%, I thought it good that Americans were cutting back.  The fact they are borrowing even less is even better.

I do not want to discount how important consumer spending is to the Economy. Consumption is the bulk of GDP.  For those who never took Econ 101, GDP is defined as: GDP = G + C + I + (X-M). C = Consumption, G = Government Spending, I = Investments, X = Exports, M = Imports.  Lower consumption leads directly to lower GDP and a slowing economy.  In itself this is bad thing.  However, I feel we can weather the storm.

What is often left out of the GDP equation is the importance of Investments (I). Investments in the Economic sense are capital outlays, i.e. building a new factory or new technology. The beauty of investments is that it not only contributes to the GDP today, but leads to greater GDP in the future. Capital improvements generally lead to increased productivity. While not all savings becomes investments, there’s no question less current spending means higher savings. There needs to be balance of current spending and savings.  American has too long in the last quarter century favored the former and frittered away prosperity dervied from the savings of the first part of the 20th century.