From Wallets to GDP
The Impact of Consumer Spending on Economic Health
Consumer spending is a critical component of the overall economy. It significantly influences economic growth, employment, and business cycles. Here are several reasons highlighting its importance:
Major Component of GDP: Consumer spending, also known as personal consumption expenditures (PCE), accounts for approximately 70% of the United States' Gross Domestic Product (GDP). This large share means that any changes in consumer spending can have substantial impacts on economic growth. For example, when consumers spend more, businesses see increased revenue, which can lead to expansion and hiring.
Driver of Economic Growth: Higher consumer spending stimulates demand for goods and services, encouraging businesses to invest in production and expansion. This, in turn, leads to job creation and higher incomes, further boosting economic activity. Conversely, a decrease in consumer spending can lead to a slowdown or recession as businesses cut back on production and employment due to lower demand.
Indicator of Economic Health: Consumer spending patterns are often used as indicators of economic health. For instance, increased spending on durable goods (like cars and appliances) can signal consumer confidence in economic stability, while increased spending on essentials (like food and healthcare) might indicate financial caution or economic distress.
Impact on Business Cycles: Fluctuations in consumer spending contribute to the business cycle's expansions and contractions. During economic booms, consumer spending typically rises, leading to increased production and employment. During recessions, consumer spending usually falls, causing reductions in business activity and layoffs.
Multiplier Effect: Consumer spending has a multiplier effect on the economy. Money spent by consumers is income for businesses and workers, who, in turn, spend their earnings, creating a cycle of economic activity. This effect means that changes in consumer spending can have amplified impacts on the overall economy.
Policy Implications: Policymakers closely monitor consumer spending to make informed decisions about fiscal and monetary policies. For instance, during economic downturns, governments may implement stimulus measures to boost consumer spending and support economic recovery.
Overall, consumer spending is pivotal to the economic ecosystem, driving growth, influencing policy decisions, and reflecting the broader economic climate.
Economic Red Flags: The Downfall of America's Consumer Market
America became a worldwide powerhouse thanks in part to its thriving consumer economy. Before, when our consumer economy accounted for more than two-thirds of GDP, countries lined up to sell to the United States. Americans are spending much less but are more likely to incur debt as a result of the cost of living problem and a personal wave of diminished confidence.
American consumers spend more money on fewer items. However, people start hoarding when confidence wanes, just like with any private wave. For the average American living paycheck to paycheck, hoarding is not an option. According to what I said, credit card debt grew by $85.8 billion in just the fourth quarter of 2022. The average credit card debt held by an American household is approximately $10,000, representing an 8.9% YoY rise.
Due to inflation and growing annual percentage rates, Americans currently owe $1 trillion on their credit cards. The Federal Reserve noted that although consumer expenditure is falling, credit card debt increased by $250 billion over the previous two years. According to different research, 46% of Americans are unable to pay their credit card bills on time each month.
Inflation and socialistic policies have damaged America’s strong capitalistic consumer economy. They say consumer spending is “cooling,” but this is indeed an “accelerating trend.” People are spending money on the basics like food and energy, and the demand for goods is simply not there. - Armstrong Economics
