Consumer expenditure makes up about two thirds of the gross domestic product in the United States each year. With this in mind, it’s fairly obvious that the state of the economy is essentially in sync with consumer spending, for better or for worse. This can be a very good thing when consumers have lots of money to spend as the economy would be in great shape. In the final quarter of 2013, GDP grew by 3.2% (seasonally-adjusted rate) while consumer spending grew at a rate of 3.3%, clearly a large driver of the fourth quarter growth. The second half of 2013 actually saw the strongest growth since 2003, when the economy was flourishing. Recently, there has been a rise in consumer confidence, people are spending more, and in order to meet this increased demand, suppliers have been ramping up production. Evidently, this is good for the condition of the economy.
On the other side of the coin lies the possibility that consumer spending is going to take a hit and slow down due to slow income growth this year. If people are not making an increased amount of money, how can we expect them (us) to continue to spend more and more money?
The income figures “raise a degree of caution for the near-term outlook because some pullback in spending growth seems likely,” said Scott Brown, chief economist at financial firm Raymond James & Associates Inc. “We came into the year priced for a strong recovery, and now it looks like it might stumble a bit.”
This is certainly a cause for concern about the economy and its continued recovery. As slow and weak as it has been, the recent increase in consumer spending has been reason for optimism looking forward; but now we might take a step backward.
That being said, the likelihood that slow income growth will stifle consumer spending is not set in stone. The increase in consumer spending towards the end of 2013 came with flat incomes in the month of December. Also, even if incomes do not grow in the near future, people can always save just a little bit less or hold off on repaying debt for the time being in order to sustain their higher amounts of spending. “The personal saving rate fell to 3.9% in December from 4.3% in November.” So clearly there are things that we (the consumers, or at least some consumers) can do, and have already started to do, in order to continue spending. It is extremely important to the continued recovery of our economy that consumers keep on spending at increased levels, and while this may not be easy to do, it can certainly be done. It will be interesting to see the growth levels of the economy and consumer spending several months from now. Hopefully any slow income growth that the country faces will not be the be-all and end-all to sustained growth in consumer expenditures going forward.