The consumer is one of the most important aspects of the US economy. Our economy is a demand-driven economy. And, the consumer represents over 70% of economic activity in the US economy. So, any moves in the consumers’s incomes or expenditures will be ripple throughout the economy. If consumer income is increasing on an increasing rate, expenditures will follow suit. If consumer income is contracting then expenditures will contract accordingly.
Where is the consumer spending their money? Retail sales is an important indicator to track where the consumer is spending money. Retail sales looks at retail stores, both traditional brick & mortar and online such as Walmart and Amazon, respectively. If the consumer is spending on retail items in an accumulating pace this shows confidence in how Americans feel about their position and future.
How the consumer “feels” about their position in the economy is also important. Consumer sentiment indicators are a vital key to what may occur with consumer expenditures. If consumers feel adverse about their economic disposition this will be seen in the consumer sentiment indexes. But, if consumers feel positive about their future lot in the economy, with an increasing rate of incomes, this will push expenditures and economic activity throughout the economy. Businesses will have to respond; we are a demand economy.
Finally, there are credit, debt, and savings considerations that are important to watch with the consumer. Is the consumer taking on more credit? Are they accumulating more debt? And, what is the rate of growth for savings? Are Americans saving more or dipping in to their savings? These are important considerations.
Personal Incomes & Personal Expenditures
The very first stop in analyzing the economy is looking at the pace, or rate of growth of the consumer. If incomes are increasing or decreasing at a rate then consumption will follow in an in-kind pace. The correlation is strong; albeit, not a perfect 1.00. The current pace for incomes and expenditures is in a declining mode and I expect along with the GDP growth, jobs data will begin to decline. This will push incomes lower. And, with higher interest rates, consumption will contract on secondary, non-essential items. The end result is, with a continued contraction with incomes, on a declining rate, consumption will follow. This is the driving force of the economy as the consumer is such a big part of the economy.
Where are consumers consuming? At retail stores and on a rate that is far surpassing the norm. If consumer income begins to contract with a move lower in jobs, this will ultimately push retail sales lower. The pace of retail sales is well outside of the norm, driven by the stimulus checks that the federal government issued. During all of this time, the supply chain has been broken and brittle. This is what has driven inflation upward like it has.
I imagine retail sales companies are going to be the ones the bear the brunt of a declining jobs economy.
Sentiment is improving. But, that is a low bar to have achieved since consumer sentiment is at an all-time low. The recent move upward is minimal. Despite the correlation between sentiment and consumption, moves upward at such a lot level would not be strong enough signal to support the consumer moving forward.
The Federal Reserve is going to have to first tame inflation. The tools for that are increasing interest rates. This will begin the process of choking the economy from further gains in consumption. I expect consumption to dissipate and sentiment to remain low accordingly.
Personal Savings, Credit & Debt
Bottom line here is that consumers are spending more and are taking on additional credit as well as going in to debt. This seems to be what is supporting consumption. But, that method has an expiration date. Consumers can only take on so much debt until the burden of paying for the debt becomes, well, burdensome.
What to look for with Consumer Economic Indicators
Overall, you are looking for a very big picture. While consumer incomes are a driving factor for the total economy, other factors such as savings and credit & debt will also push the economy. But, eventually, the debt levels with increasing interest rates are going to factor into the economy.
Ultimately, putting together the entire picture for the US consumer is the best starting point for understanding what will happen next in the economy. Jobs are an important factor and this will be the next big thing to look at.