Principles of Macroeconomics
November 30th, 2011
Consumer spending is defined as “the goods and services bought by the households in the satisfaction of their wants and needs.” (BusinessDictionary.com). It is also known as personal consumption expenditure and is the largest part of aggregate demand or effective demand at the macroeconomic level. Why is consumer spending important in the U.S. economy? In fact, consumer spending is the single biggest determinant of the U.S. economy’s health, accounting for about two-thirds of the United States’ annual Gross Domestic Product (GDP). A decline in consumer spending could spoil the U.S. economy or certain market sectors. By paying close attention to the economic reports that track consumer behavior, one may be able to distinguish significant changes in spending habits and adjust their portfolios accordingly. The purpose of this paper is to examine different aspects that could affect the consumer spending, determining whether consumer spending could drive a recovery in the economy, and knowing when and how to get the consumers to spend again. Perhaps, at the end, we as the consumers could really help drive this economy out of its slump by understanding consumer behavior and adjusting our spending habits suitably.
Everyday, consumers make decisions about goods and services we purchase. There are several factors that affect these decisions. Some of these are prices, choices, needs, etc…Apart from these; there are also others that change consumer spending. One such factor is the level of their income. As the expectations of future income and employment decrease, the level of consumer spending also decreases and the level of saving starts to increase. The willingness of people to make major spending commitments depends on how confident they are about both their own financial circumstances, and also the general state of the economy. Research shows that in June of 2011, U.S, consumer spending unexpectedly dropped for the first time in almost two years due to the slump in hiring. It is one factor that hurts the household confidence. “Purchases declined 0.2 percent after a 0.1 percent gain the prior month.” (Chandra) Moreover, the effect of wage gains that have failed to keep pace with the inflation combined with the lack of jobs together raise the risk of further cuts in consumer spending, which account for 70 percent of the world’s largest economy. The dropping prices of stock and the increase in price of gas make the situation even worse for those who are facing luster wage growth in this phase. Some of the numbers are – “S&P 500 Index fell over 2.6 percent in August to 1,254.05; and as the Treasury security rose, the yield on the 10-year note was sent down to 2.61 percent from 2.75 percent in the same month.” (Chandra) In the contrary, the Americans boosted their savings rate to 5.4 percent, the highest since last year from 5 percent. This shows the slump in consumer confidence could threaten to derail any recovery. Also wages are so sluggish that they are affect ting consumer spending and confidence as well. Weekly earnings had dropped 0.9 percent in the 12 months ended in June on average (figures from the Labor Department). Furthermore, the labor market is still struggling to heal. The jobless rate rose up to 9.2 percent in June while payrolls grew up by 18,000, the fewest in 9 months. (Chandra) In addition, the economy had failed to create more jobs to fill up the unemployment gap; thus, reducing consumer purchasing power. Another factor also affects the level of confidence in consumer spending is fuel costs. It has been said that higher expenses for necessities such as energy are also limiting purchasing power. The cost of regular gasoline rose in May to about a three-year high of $4 per gallon, and remained $3.70 at the end of July, according to AAA auto group. Higher gasoline prices are causing many...