Job loss turns into less money in the pockets of consumers. Less money in the pockets of consumers turns into decreased consumer spending, decreases in consumer spending leads to an ailing economy. That sounds pretty simple except for one part. Why does a slowdown in consumer spending invariably mean that there will be a recession? This question is especially significant when consumer spending falls by a seemingly low percentage. This year, consumer spending dropped by roughly one percent. Can a one percent drop in consumer spending really translate into a recession? The answer is a tough one, before diving into it, we need to reflect on the other events that contributed to this recession in particular.
This recession was not caused by job loss or consumer spending slowdowns. It began with the real estate meltdown, mortgage and credit crisis, and trickled its way down into just about every industry. Although job loss and consumer spending were not the root causes of this recession, these two components greatly fuel the recession.
A one percent drop in consumer spending is significant because of the large sum of money that is spent by consumers annually. Let's say that consumers spend 100 Billion dollars this year throughout the country (that's only three hundred dollars per person, this is obviously an extremely conservative example), a one percent drop would equal one hundred million dollars. That is one hundred million dollars stripped from the revenue of the biggest corporations in the world. Now imagine the real numbers. I can't say that I know exactly how much money consumers spend in a given year. But, I can imagine it being significantly more than three hundred dollars per year per person. This year a lone as a student I have spent well over five thousand dollars.
This is why consumer spending can fuel a recession. A decrease in consumer spending by a mere one percent can diminish the revenues of the largest companies in this country. Don't think that I am neglecting the part of the question that asks about how job loss contributes to the worsening of a recession. The fact is that job loss creates a decrease in consumer spending, which in turn decreases the revenue of the companies that are trading in the stock market, which in turn brings down their value. The last step is the diminishing effect that this has on the retirement funds and the portfolios of the average American.