Final answer:
During economic recessions, consumers spend less due to increased unemployment leading to decreased income, reduced wealth, tighter credit, and uncertainty about the future, causing them to cut back on non-essential spending and save more. Government interventions aim to combat these tendencies and stimulate spending.
Step-by-step explanation:
How Consumers Spend Less During Economic Recessions
During economic recessions, such as The Great Recession of 2008-2009, consumers tend to spend less for several interrelated reasons. In the face of rising unemployment, as reported by the Bureau of Labor Statistics (BLS) with the number increasing from 6.8 million to 15.4 million, individuals have less income to spend. The BLS indicated that household spending dropped by 7.8% during this period. Moreover, declines in home values and general economic uncertainty reduce wealth and consumption expenditures. People become wary of the future and thus hold back on non-essential and discretionary spending. Furthermore, credit becomes tighter and individuals are less inclined or able to borrow to finance spending. These factors represent a combination of reduced capacity and willingness to spend. Measures such as the American Restoration and Recovery Act attempted to mitigate these effects by providing economic stimuli.
Keynesian economics suggests that recessions are periods where aggregate demand falls short of full employment output, leading to reduced consumption and investment. A decline in expected future income causes consumers to pull back on consumption, while a fall in wealth or market downturns lead to decreasing consumption expenditure. During the recession, not only do consumers spend less, but businesses also invest less due to reduced expectations for profitability.