Personal Consumption Archives - Colorado-based Business and Economic Research

It is the time of the year when retail stores pull out their Christmas goods and decorations in anticipation of the upcoming holiday season. At the same time, trade associations and economists dust off their Grinchmeters to project consumer’s willingness to share in the spirit of giving.

Recently, the National Retail Federation (NRF) released their forecast stating that 2011 holiday sales will post a 2.8% increase over last year and the total will reach $465.8 billion. While the increase is weak compared to last year’s increase of 5.6%, it is comparable to the average for the past 10 years. Nationally, retailers are expected to hire a half million seasonal workers this season.

The following factors may point to a better than average season.
• There have been 14 back-to-back months of increased retail sales and momentum is established.
• More people are working than a year ago.
• There is a lower level of household debt, although a portion of that decline is a result of foreclosures.
• The Grinch may get lost this Christmas season.

On the other hand, the following factors may cause sales to be average or worse.
• Lack of consumer confidence.
• Lack of confidence by business leaders.
• Higher inflation, particularly higher gas and food prices.
• Lack of wage and job growth.
• A return of extreme volatility in the stock market.
• Uncertainty associated with the 2012 elections.
• Consumer shopping patterns have been altered.
o Consumers are spending less time in stores, which reduces impulse sales.
o Increased Internet sales.
o Consumers have been trained by retailers to expect sales or heavy discounting.
o Consumers have learned that lower levels of gift giving are acceptable.
o Some consumers have chosen to give gift cards rather than purchase a gift.
• In an article by the New York Times (A Contradiction in the Cargo), the volume(August imports) at the country’s 5 busiest container ports are flat or below the same period in 2010.
o Los Angeles, down 5.75%
o Long Beach, down 14.2% from August 2010; a decline of 15% is projected for September.
o Savannah, GA, down 4%.
o Oakland, down 0.9%
o New-New Jersey, imports were flat.
Fewer imports may signal that retailers are projecting only modest gains in sales this season.

In short, it will be a challenging season for retailers, but not necessarily a buyer’s season for consumers.

Note: The NRF defines “the holiday season” as November and December. Sales generated during these two months are often a significant portion of the annual total for many businesses. The NRF also states that retail sales include most traditional retail categories – discounters, department stores, grocery stores, and specialty stores. Automotive dealers, gas stations, and restaurants are not included.

There are an abundance of data sets that are useful in evaluating the performance of the U.S. economy. If only one could be used to measure overall performance it would be Real GDP, or the inflation adjusted output of the economy. The current Real GDP is approximately $13.4 trillion.

There are 4 components of the GDP. Mathematically speaking GDP= C+I+G+X.

The following analysis briefly looks at the change in the composition of output for each of these four components over the past two decades. As such, it is not intended to depict the total amount of output or changes in that output.

Consumers (C) are the primary drivers of the U.S. economy. As can be seen, the importance of the consumer has increased:
• Q1 1990 Personal consumption was 65.8% of Real GDP.
• Q1 2001 The go-go 1990s treated the consumer well – too well. Consumption rose to 69.4%.
• Q1 2003 Consumers were encouraged to keep spending as a way to pull the country out of the 2001 recession. Consumption rose to 70.2%. Creative financing helped sustain auto sales and allowed home owners to use their dwellings as ATMs. As a result consumers saved less, spent more, and became overleveraged.
• Q1 2008 The Great Recession and the accompanying housing bust caused sharp declines in Investment (I). That decline increased the importance of government and consumer spending (70.3%).
• Q1 2011 The reliance on consumers continued as housing markets remained weak and government spending tapered off. Consumption rose to 71.1% of Real GDP.

Investment (I) includes business spending and the housing markets. The ups and downs of the contribution of investment follow:
• Q1 1990 Investment was 15.4% of Real GDP.
• Q1 1992 After the 1991 recession, investment dropped to 13.1%.
• Q1 2000 Investment rose during the go-go 1990s to 17.4%.
• Q1 2002 The 2001 recession pushed investment down to 15.5%.
• Q1 2006 With the recovery, business activity increased and investment rose to 17.7%.
• Q1 2009 Investment dropped to 11.7% as a result of the Great Recession and the fallout in the housing market.
• Q1 2011 With the recovery, a slight rebound has been seen. Investment has risen to 12.5% of Real GDP.

Government (G) spending was 20.3% of real GDP in Q1 1990. Shortly after, expenditures related to the first Iraq war and the 1991 recession temporarily drove the percentage up slightly. For the remainder of that decade, the strength in personal consumption and investment decreased the relative importance of government spending. Its percentage of real GDP declined to 17.5% in Q1 2000. Since then, it has risen steadily as a result of the wars in Iraq and Afghanistan and efforts to offset the effects of two recessions. Government spending was 20.2% of real GDP spending in Q1 2011.

Finally, net exports (X) have subtracted from Real GDP, i.e. there has been a trade deficit for over 20 years. In Q1 1990, Real GDP was -1.6% of Real GDP. As the trade deficit increased, net exports reached -5.9% of Real GDP in Q1 2006. In Q1 2011, net exports were -3.8% of Real GDP.

This zero sum analysis illustrates how declines in the relative importance of one GDP component require increases in the relative importance of other components. In short, this analysis shows the role of the consumer (C) in the recovery and the drag placed on the economy by the decline in the contribution of investment (I), particularly the housing market.

Looking to better times in the months ahead and an economy that has more balanced output.

Tag: Personal Consumption

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