Read the following article and the question prompts.

Will U.S. Consumers Be Spending Less?

In 2014, consumption was 68.5 percent of GDP in the United States. Consumption is a larger fraction of GDP in the United States than in most other high-income countries or in rapidly growing countries such as China and India. As shown in the following figure, over time, consumption in the United States has increased as a fraction of GDP. Through the mid-1980s, consumption was less than 65 percent of GDP. By the early 2000s, consumption had increased to about 70 percent of GDP.

U.S. households financed this increased consumption partly by reducing saving and partly by increasing borrowing. While households were saving about 10 percent of their income in the mid-1980s, saving dropped to about 1 percent by 2005. Low saving rates were partly due to an increase in household wealth resulting from rising housing prices and rising stock prices. In many parts of the country, housing prices increased rapidly between 2001 and 2006. Stock prices, as measured by the Dow Jones Industrial Average and the S&P 500, reached record highs in October 2007. Some households felt less need to save out of their current incomes because their homes and their investments in the stock market were increasing in value.

During the early 2000s, many households borrowed against the increased value of their homes by taking out home equity loans, which many banks were increasingly willing to grant. Banks and other financial firms also loosened the requirements for issuing credit cards, so some households with flawed credit histories were able to borrow against their credit cards to finance their spending. The ratio of loans and other household debt to household income, which had been about 65 percent in the mid-1980s, rose to a record 133 percent in 2007 before declining to 102 percent in mid-2011. Housing prices began to decline in 2006, and that decline accelerated with the start of the recession in December 2007. Stock prices also declined sharply. The combination of falling housing and stock prices wiped out trillions of dollars in household wealth. Banks and other financial institutions also tightened lending standards, making it more difficult for many households to borrow money. In the face of declining wealth and with reduced access to loans, household saving rates began to increase, rising above 6 percent by 2009. As the economy recovered from the recession, the saving rate declined to about 5 percent in 2016.

Increased household saving can be good news for the economy in the long run because it provides more funds that firms can borrow to finance investment, which can lead to more rapid rates of economic growth. But in the short run, many firmsparticularly firms such as Ford that sell consumer durables worried that the slow recovery from the 2007 to 2009 recession was due in part to the determination of U.S. households to cut back on spending and increase saving.

Sources: U.S. Bureau of Economic Analysis; Organization for Economic Cooperation and Development; and United Nations.

Questions to think about:

• Suppose you are an economist of the US government? Will you encourage US households to consume more or save more?
• What do you think about the phenomenon that many households borrowed against their home values in early 2000s?
• Do you think the household consumption as a percentage of GDP will continue to rise or fall in the future? Will households save more or save less in the future?
• What do you think about the US GDP growth in the future?