Consumer spending, which makes up nearly 70% of the nation’s gross domestic product, dropped alongside the housing market, The Federal Reserve Bank of Philadelphia said Tuesday.
The collapsed housing market continues to recover in retrospect, but consumer spending is still challenged by economic uncertainty.
The U.S. is now in the fourth year of an economic expansion that began back in 2009, but economic growth continues to be a roller coaster ride. "The general path has continued to be forward, but we've made far slower progress than anyone would like," said the Philadelphia Fed.
So when housing values fell dramatically, many families lost their home equity and savings.
The Philadelphia Fed says monetary policy in recent years was aimed at lowering the cost of borrowing to spur consumption.
The government’s belief is that by lowering interest rates, monetary policy lowers the price of consuming today in relation to consuming in the future. This is expected to encourage households to reduce savings and spend today, creating a healthier overall economy.
But the Philadelphia Fed voiced concerns that a low interest-rate policy may actually frustrate consumers as they watch their savings accounts gain smaller returns.
This wary mindset among consumers is reflected in how corporations view their potential customers today.
"Even though the balance sheets of most corporations are in pretty good shape, we continue to hear of weak demand and a great deal of uncertainty," the Philadelphia Fed reported.