Although the Dow Jones Industrial average posted a 125-point gain on Friday, it was down a bit for the week. The massive drops on Monday and Wednesday of 635 and 520 points respectively, indicate that the market feels exactly what businesses and consumers are already thinking: we could be headed for another recession.

With unemployment being consistent in the 9% area for a long time, it really appears the economy never got out of the first recession, so there's really no "double dip." Many factors led us into the recession, but the usual forces that take us out aren't working.

Economics 101: Consumer Spending and GDP

The largest part of our economy is the consumer. Consumers make up 67% of our Gross Domestic Product (GDP), or the total of all goods and services produced in the U.S. GDP grew at only .8% in the first half of the year. With 9.1% unemployment, obviously those that don't have jobs have no money to spend, and those that do are afraid of losing theirs, so they aren't spending either.

If the consumer continues to go to the mall, they either aren't spending, or certainly not spending what they used to. Even back to school shoppers are holding back.

Businesses Aren't Spending Yet

From makers of heavy equipment and producers of durable goods (those that last more than three years,) to restaurants, business owners are keeping their money, just like the consumer. Since the consumer is putting off buying those items that last a long time, the manufacturers don't need to produce them, so they lay off workers to save on payroll, which is usually their highest expense. That means more unemployed people, which means less consumer spending.

For example, a restaurant owner in Salem, Massachusetts was going to build a $50,000 patio to enclose the restaurant's porch, but he decided not now. While that's not even a drop in the bucket compared to total GDP, there are many other businesses that aren't spending and it all adds up.

Government Spending on the Rocks Too

Yes, even governments are cutting back on spending due to dwindling tax revenues. The Washington State budget officer sent a memo to the state's agency directors to take an additional 10% in spending cuts.

Until consumers, businesses and the government pick up their spending, and until a lot of the uncertainty in world markets subsides, we will continue to see a lot of volatility in the markets. 

Have you been spending less lately?