MARKET ANALYSIS

CONSUMER SPENDING

Consumer Spending, often referred to as consumption, relates to the amount of money spent by households on both durable and non-durable goods and are considered by the economist John Keynes as the most important determinant of short term demand in an economy.

Data detailing consumer spending is closely correlated with retail sales data and inflation. These numbers are released monthly and can be used in comparison to previous months.

When a government wants to expand the economy it will attempt to stimulate consumer spending which can be done via tax cuts or even through quantitative easing. A reduction in tax will increase disposable income causing individuals to buy more resulting in companies experiencing higher revenues driving employment demand.

An economy requires a good level of consumer spending so that it expands but too high a level will boost inflation thus hindering economic growth.

The GfK Consumer Confidence figure released at the end of each month expresses whether there is a level of optimism or pessimism within consumers and can be used as a barometer for upcoming consumer spending figures.

Other important indicators to consider in this area include Personal Income, Personal Spending, Retail Sales and University of Michigan Sentiment.

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.