Consumer spending
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Consumer spending or consumer demand or consumption is also known as personal consumption expenditure. It is the largest part of aggregate demand or effective demand at the macroeconomic level. There are two variants of consumption in the aggregate demand model, including induced consumption and autonomous consumption.
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[edit] The Effects of Stimuli on Consumer Spending
[edit] Taxes
Taxes are known for being a potent tool in the adjustment of the economy. When it comes to consumer spending, the way tax policies are implemented to different consumer groups strongly determines the effect the tax will have. Consumers try to maintain a consistent flow in their spending and do not often like to undergo drastic changes in their spending habits. So unless the income of the consumer will be changed permanently, or for an extensive period of time, the consumer will tend to not change their spending levels or habits. Therefore, temporary tax changes rarely result in a large change in consumer spending. However, in lower income consumer groups this proves to not always be the case. If a household has a low income level, they are less able to readily borrow money. This means that they will tend to spend temporary cuts in taxes just as quickly as they would permanent ones.
Also, consumers tend to only alter their spending habits once tax changes have an effect on their personal take home income. This proves surprising because consumers understand that tax changes are being made, yet their expectations do not change their spending. Expectations are the feelings of the consumer when they believe that something affecting their fiscal well-being is about to happen, like a tax change. For instance, if the consumer believes, or expects, that they will soon lose their job, they will decrease their spending in order to compensate for the hard times they predict they will suffer in the future. Once the tax change proves to have a direct impact on the consumer’s income, changes in their spending occur, but not until that time.[1]
[edit] Consumer Sentiments
Consumer sentiments are the attitudes of households and entities toward the economy and the health of the fiscal markets, and they are a strong constituent of consumer spending. Sentiments have a powerful ability to cause fluctuations in the economy, because if the attitude of the consumer regarding the state of the economy is bad, then they will be reluctant to spend. Therefore sentiments prove to be a powerful predictor of the economy, because when people have faith in the economy or in what they believe will soon occur, they will spend and invest in confidence. However sentiments do not always affect the spending habits of some people as much as they do for others. For example, some households set their spending strictly off of their income, so that their income closely equals, or nearly equals their consumption (including savings). Others rely on their sentiments to dictate how they spend their income. So if their sentiments are high, then they tend to spend a little more, but if their sentiments are low they will cut back and perhaps spend less on unnecessary items. But when these optimistic, “forward-looking” people put their faith in good sentiments and increase their spending, the health of the economy increases and in turn so does the overall income level. This then impacts the more conservative consumers who spend within their means, as they now also benefit from a healthy economy and a higher income, and they increase their spending as well. Sentiments are extremely potent and are an important part of consumer spending.[2]
[edit] Government-Implemented Economic Stimuli
In times of economic trouble or uncertainty, the government often tries rectify the issue by distributing economic stimuli, often in the form of rebates or checks. However such techniques have failed in the past for several reasons. As was discussed earlier, temporary financial reprieve rarely succeeds because people do not often like rapidly shifting their spending habits. Also, people are many times intelligent enough to realize that economic stimulus packages are due to economic downturns, and therefore they are even more reluctant to spend them. Instead they put them into savings, which can potentially also help spur the economy. By putting money into savings, banks profit and are able to decrease the interest rates, which then encourage others to save as well and promote future spending. However, when stimulus plans do not promote consumer spending as the government intended, the government sometimes attempts to spend the money themselves, otherwise known as deficit spending. This would prove potentially effective if not for the fact that consumers often see what the government is trying to do and decrease their personal consumer spending even further with the understanding that they will have to pay for the deficit spending of the government in the future.[3]
[edit] Oil
Oil is an extremely valuable and vital resource to economies and societies everywhere. There is a very strong relationship between the increase in oil prices and real growth in the economy. When a society suffers a disturbance in energy supplies, there is potential for a shock to expensive consumption or investment goods that are heavily dependent on energy, like motor vehicles and machinery. This is because disruption in energy supplies creates uncertainty regarding availability and upcoming prices of these supplies. Often time consumers attempt to delay the purchase of such items until they have a better idea of what energy prices are going to look like after the subsiding of the disruption. Also, increases in the price of oil means a greater portion of the consumer’s income is required to purchase oil, and therefore less can be used in the purchase of other goods. Oil price changes, both increases and decreases, have an extremely potent effect on allocative channels. Allocative channels occur when entities must chose how to allocate their resources when it is very expensive to shift labor and capital between the sectors of their business affected by the change in oil prices.[4]
[edit] Luxury Consumer Spending
[edit] Spending on Luxury Goods
In the United States in 2007 luxury goods accounted for a $157 billion industry[5]. In the period between 1979-2003, household income grew 1% for the bottom fifth of households, 9% for the middle fifth, and 49% for the top fifth with household income more than doubling (up 111%) for the top 1%[6]. If the above trend had been reversed, there wouldn’t be nearly as many extravagant luxury items on the market such as $1 million cars and $45 million private jets. Even in such a slowing economy, there is still a big market to get consumers to spend their money on luxury items. The luxury goods market is a continually growing industry with marketers always trying to get consumers to spend their money on luxury goods. Even in a slowing economy there is still a strong market for luxury goods. The luxury industry doesn’t seem to be going anywhere either. No matter what the economy does, as stated above, the luxury market will still be strong. Even from sources dating back to the 1960’s there is discussion of the broadening spectrum of luxury markets and why Americans place so much value in materialistic goods[7]. This says a lot about our society and gives some strong evidence to the fact that our society is just getting more and more materialistic as time goes on. The concepts of how Americans handle money have stood the test of time serve as a valuable insight for how American consumer spending might progress through the years.
[edit] Debt Caused by Luxury Spending
No matter what there will always be a demand for money, and where there is a demand for money a select few pull away from the pack and become the upper class. Even though some consumers might be in a pinch with the struggling economy, most American consumers have a very hard time saying goodbye to their luxury goods that they have become accustomed to. This is when the economy starts to see a rise in credit card debt until it reaches a peak. That’s when the luxury good market starts to take a hit, but it’s not nearly the same level of a hit that the rest of the consumer markets take. Most of the companies that cater to the ultra rich have a steady flow of customers no matter what shape the economy is in since the wealthy 1% of the population accounts for 30% of the population’s assets[6].
[edit] Consumerism
Consumerism is not an inevitable stage in industrial development. Rather it has been a choice made within complex cultural, political, and social contexts. This supports the earlier claims about American’s desire for luxury goods and how the top 1% are the ones that can afford them. It explains the reasons how industrialism helped consumerism along by providing the goods but at the same time it hurt consumerism for the people who kept the industrial world running. This happened because the workers were so busy trying to make their living making these goods that when it came down to trying to buy any luxury goods they either didn’t have enough money or they didn’t have the time to buy or use the luxury goods[8]. That simple fact is what helped along the upper 1% gain 30% of the nations economy.
[edit] Data
[edit] United States
In 1929, consumer spending was 75% of the nation's economy. This grew to 83% in 1932, when business spending dropped. Consumer spending dropped to about 50% during World War II due to large expenditures by the government and lack of consumer products. It has risen since 1983 to about 70%, as the result of relaxed consumer credit. Spending dropped in 2008 as the result of consumer fears about the economy. Consumers saved instead of spent.[9]
[edit] See also
[edit] Footnotes
- ^ Steindel, Charles (Current Issues in Economics & Finance) (10 March 2009). The Effect of Tax Changes on Consumer Spending.
- ^ Mehra, Yash P., and Elliot W. Martin (Economic Quarterly) (11 March 2009). Why Does Consumer Sentiment Predict Household Spending?.
- ^ Carnahan, Ira (Forbes) (10 March 2009). Mickey Mouse Economics.
- ^ Mehra, Yash P., and Jon D. Petersen (Economic Quarterly) (10 March 2009). Oil Prices and Consumer Spending.
- ^ American Chamber of Commerce (2007). Snapshot of the U.S. Luxury Goods Market.
- ^ a b Caserta, Kimberly (12 Mar 2009). Luxury Good Demand. Boston College.
- ^ Friedman, Milton (June 1961). The Demand for Money. Proceedings of the American Philosophical Society.
- ^ Cross, Gary (1993). Time and Money: The Making of Consumer Culture.
- ^ Simon, Ellen (The Associated Press) (November 29, 2008). Meltdown 101:Should consumers drive the economy. Burlington Free Press.
