Five Reasons for Economic Optimism

The simplest explanation of what led to this financial and economic mess is that too many American consumers spent more than they earned. That's ending, in dramatic fashion: consumer spending dropped in the fourth quarter at the fastest rate in 29 years. After skidding along near zero from 2005 through 2007, the savings rate (income minus spending, divided by income) hit 5% in January, the highest since 1995. This rapid retrenchment is the main reason we sank so quickly into a deep recession. But as long as the consumer pullback doesn't spiral into an economic shutdown (that's where the government comes in), it is a healthy medium- and long-term development. The pullback clears the deck for spending increases in the not-too-distant future: people are going to have to buy cars one of these days. And as long as the spending increases remain moderate, the U.S. economy will be on a much more sustainable path.

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