MARKET ANALYSIS

CONSUMER SPENDING

Overview

Consumer spending, or consumption, is the total amount of money spent by households and individuals on goods and services. It is a crucial indicator of economic health, accounting for approximately 70% of the Gross Domestic Product (GDP) in many economies. High consumer spending typically signifies a strong economy, as it indicates that consumers have confidence in their financial stability and future income prospects. Conversely, low consumer spending can indicate economic trouble, suggesting that consumers are saving more due to uncertainty or declining income.

Key Metrics

• Retail Sales: Measures the total receipts of retail stores, reflecting consumer demand for finished goods.
• Personal Consumption Expenditures (PCE): Reflects spending on durable and non-durable goods and services. PCE is a broad measure that provides insights into overall economic health.
• Consumer Confidence Index (CCI): Gauges consumer optimism about the economy’s prospects. High confidence typically leads to increased spending.

Implications

• Economic Growth: High consumer spending drives business profits, leading to more investments and job creation. It fuels economic cycles of growth and expansion.
• Policy Decisions: Governments and central banks monitor consumer spending closely. In times of low spending, they may introduce stimulus measures such as tax cuts, increased public spending, or lower interest rates to encourage consumption.

Factors Influencing Consumer Spending

• Income Levels: Higher disposable incomes typically lead to increased consumer spending.
• Credit Availability: Easier access to credit allows consumers to spend more.
• Inflation: Rising prices can erode purchasing power, reducing the amount consumers can spend.
• Economic Outlook: Positive economic forecasts boost consumer confidence and spending.

Personal Spending

Country

Type
Consumer spending

Announced
Monthly, around 30 days after the month end

Description
Personal spending is the sum of personal consumption expenditures, personal interest payments and personal current transfer payments. Personal consumption expenditure is the largest component of GDP as households are the largest consumer of U.S. final product.

Personal consumption expenditures measures purchases of goods and services by households and by non-profit institutions serving households from private business.

It also includes purchases of certain goods and services provided by general government and government enterprises, such as tuition payments for higher education, charges for medical care, and charges for water and other sanitary services.

Consumer Confidence

Country

Type
Consumer Spending

Announced
Monthly

Description
A measurement of attitudes about current economic conditions and near-term expectations. In the US, The Conference Board surveys a sample of 5,000 consumers across the country about current and future business and employment conditions and total family income for the following six months.

Since consumer spending drives two-thirds of the US economy, if individuals limit their spending, economic growth could be stifled. However, consumer confidence and retail sales trends do not necessarily correlate.

In the UK, GfK carries out the monthly survey on behalf of the European Commission, who sponsors the same research in all EU member countries. For stocks, strong economic growth translates to healthy corporate profits and rising share prices so the consumer confidence index is often carefully monitored by those interested in financial spread betting. Bond markets are more concerned about excessive economic growth leading to inflation.

The UK Nationwide Consumer Confidence Index is based on the answers to five questions regarding how 1000 adults currently feel and how they consider prospects will change in the next 6 months. It is important as it gives an insight into the general public’s view of the economy.

For each of the 5 questions, there are three response options; positive, neutral and negative. For each of the five questions the positive figure is divided by the sum of the positive and negative to yield a proportion, which we call the relative value.