I n t h I s c h a p t e r y o u w I l L

C o n s u m e r s G e t t h e C r e d i t
f o r E x p a n d i n g E c o n o m y
B
Y
R
ICHARD
W. S
TEVENSON
W
ASHINGTON
—President Clinton claims
the credit for himself, and analysts cite
an array of other possible factors, but
the most important source of the econ-
omy’s remarkable resilience and vibrancy
this year appears to be the consumer.
For most of this year, Americans
have spent prodigiously on homes, cars,
refrigerators, and dinners out, carrying
forward an aging economic expansion
that as recently as January seemed in
danger of expiring. In the process, they
have largely ignored warning signs that
they are becoming overextended.
The consumer spending spree was
a major force in the surprisingly robust
economic data released Friday, econo-
mists said. The Labor Department es-
timated that the economy created
239,000 jobs in June, far more than
expected, making that month the fifth
consecutive one with strong employ-
ment gains. The unemployment rate now
stands at 5.3 percent, the lowest in six
years, and economic growth is so rapid
that it has revived fears of inflation.
Among the industries showing the
biggest gains was retailing, which added
75,000 jobs in June, nearly half of them
in what the government classifies as eat-
ing and drinking places. Job growth was
also strong at car dealers, gas stations,
hotels, and stores selling building materi-
als, garden supplies, and home furnish-
ings. Employment in construction was up
by 23,000, reflecting in part the contin-
ued upward strength of home building.
Just how long consumers can carry
on with their free-spending ways, how-
ever, remains an open question and one
that is critical to policymakers at the Fed-
eral Reserve as they decide whether to
raise interest rates to keep the economy
from accelerating enough to generate in-
creased inflation.
Some economists believe that con-
sumers have amassed so much debt
that they will be forced to rein in their
spending for the rest of the year, result-
ing in a slackening of economic growth.
Credit card delinquencies in the first
quarter were at their highest level since
1981, and personal bankruptcies were
up 15 percent from the first three
months of 1995. . . .
Most economists also agree that
the surge in spending this year has been
driven in large part by temporary fac-
tors—including low interest rates, higher-
than-expected tax refunds, and rebates
from automakers—that have been re-
versed or phased out. . . .
One wild card in assessing the
course of consumer spending is the
stock market, which has been making
relatively affluent consumers feel flush
with its continued boom. Economists
have grappled for years with the ques-
tion of the extent to which paper gains
on stock market investments lead con-
sumers to spend more, and they still do
not agree on an answer. But they said it
was relatively clear that the bull market
of recent years—and the fact that more
and more Americans invest in the market
through retirement plans and mutual
funds—has provided some impetus to
consumers to spend more.
S
OURCE
:
The New York Times,
July 8, 1996, p. D3.
I N T H E N E W S
How Consumers Shift
Aggregate Demand
C
ONSUMERS
: A
GGREGATE
-
DEMAND SHIFTERS

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PA R T T W E LV E
S H O R T - R U N E C O N O M I C F L U C T U AT I O N S
of producing food products. Or a war in the Middle East might interrupt the ship-
ping of crude oil, driving up the cost of producing oil products.
What is the macroeconomic impact of such an increase in production costs?
For any given price level, firms now want to supply a smaller quantity of goods
and services. Thus, as Figure 31-10 shows, the short-run aggregate-supply curve
shifts to the left from 
AS
1
to 
AS
2
. (Depending on the event, the long-run aggregate-
supply curve might also shift. To keep things simple, however, we will assume
that it does not.)
In this figure we can trace the effects of the leftward shift in aggregate supply.
In the short run, the economy moves along the existing aggregate-demand curve,
going from point A to point B. The output of the economy falls from 
Y
1
to 
Y
2
, and
the price level rises from 
P
1
to 
P
2
. Because the economy is experiencing both 
stag-
nation
(falling output) and 
inflation
(rising prices), such an event is sometimes
called