If you really want to measure economic growth, keep your eye on one statistic—consumer spending.
One of the key determinants to economic growth in America is the level of consumer spending. That’s because consumer spending accounts for approximately 70% of the overall gross domestic product (GDP).
This makes it imperative to have a stable upward trajectory for consumer spending if economic growth is to rebound over time.
While we certainly wouldn’t want the level of consumer spending to exceed the level of personal income by a massive amount (as that would indicate savings were being eroded), a lack of consumer spending can indicate that people are unsure of their financial situation.
The latest report on consumer spending by the U.S. Department of Commerce showed that retail sales increased by 0.4% in June versus May, which is less than what analysts expected. The core retail sales, which excludes motor vehicles and associated parts, was unchanged versus expectations of 0.5% month-over-month growth. (Source: “Advance Monthly Sales for Retail and Food Services June 2013,” U.S. Department of Commerce, July 15, 2013.)
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Uncertainty is a big concern when it comes to economic growth. Because consumer spending makes up such a huge part of our economy, if people are worried about their future, they will hold off on their purchases, causing a reduction in economic growth.
That report also showed a decrease in spending in department stores, restaurants, and bars. Since inflation is low (between one percent and two percent) and earnings are growing at approximately two percent per year, if an increase in wealth from higher home prices and the stock market is added to the mix, one can only conclude that consumer spending is relatively weak because the average American is worried about their future.
That type of opinion is difficult to turn around. At this point, there are very few policy initiatives that the Federal Reserve can implement to improve confidence any more than they already have. Even though the Federal Reserve has helped the real estate market turn around, economic growth remains low.
While consumer spending is just one data point, it can be a serious concern if it slows down. Since the Federal Reserve has thrown everything it can at the markets to get the level of economic growth back up to reasonable levels, there’s not much left in the Fed’s arsenal.
Of course, the big drag on economic growth over the past year has been the reduction in fiscal spending. With fiscal cuts amounting to almost a one-percent hit to the first-quarter GDP, the impact of this on the psychology of Americans could result in lower levels of consumer spending.
Naturally, as humans, we will seek safety when we are unsure of our environment. If a person thinks they might lose their job, the logical reaction would be to cut their spending. Even if job cuts don’t occur, that kind of negative thinking can and will affect economic growth.