Consumer Spending: What Came First, the Chicken or the Egg?
Many trends changed direction in 2013. The recovery narrative of the labor market has dominated headlines in the past few months; as of November, the most recently available data, United States had experience four solid months of job gains and the unemployment rate had sunk to a five-year low of 7 percent. But, almost equally important, are the improvements in consumer spending figures. After the Department of Commerce reported that the personal consumption metric, which reflects how much consumers spend on products like electronics and services like healthcare, rose 5 percent, the fast pace since June, Bank of Tokyo-Mitsubishi UFJ chief financial economist Chris Rupkey commented that, “Next year is shaping up to be the better tomorrow we have wanted to see ever since the recession ended almost five years ago.”
Strong consumer spending is essential for the recovery of the American economy. Consumer spending accounts for approximately 70 percent of gross domestic product in the United States, and because government and business spending have remained weak, the economy is depending even more on household spending to fuel growth. For economists, the all-important question is where the consumer spending trajectory is headed this year.
In 2013, automated, across-the-board spending cuts implemented in March kept government spending down, while businesses have hesitated to boost spending, especially in terms of hiring new employees. Their caution was largely based in the fear that consumers would not increase their outlays on goods and services. While the overall picture of consumer spending is one of improvement, a closer view reveals more conflicting indicators about the health of the American consumer. Sales of big-ticket items like cars and houses are booming, likely the result of pent-up demand, but spending has been sluggish in retail stores and restaurants. That pattern suggests that American consumers are more confident in purchasing longer-term “big ticket” items than they are increasing everyday expenditures.
The relationship between business spending, job creation, and consumer spending is a close one. Bloomberg’s Michael McKee describes it as “chicken and the egg” connection, meaning U.S. businesses do not want to spend money unless they are sure consumers will be spending money on the goods and services they produce. Consumer must then spend money before businesses boost hiring. However, the American public needs employers to increase job creation in order to feel more financially secure, hence the “chicken and the egg” comparison.
Spending is increasing. In September, October, and November, consumer spending rose faster than it has in any three-month period since the Great Repression. As a result, retail sales numbers have improved as recent reports from the Commerce Department illustrate. In the same time frame, the labor market has also taken great strides forward, providing further evidence that consumer spending will continue to grow in 2014 as consumer confidence becomes more broader based. Data has also shown that in November businesses stepped up spending on machinery, computers, and other long-lasting goods, investments that indicated companies are more confident about their economic future. That Americans bought more cars and homes in 2013 has increased the demand for steel, furniture, and other goods and prompted factories to hire more workers.
December’s retail spending figures will not be released until later this month month, but reports compiled by the industry trade groups — the International Council of Shopping Centers and Johnson Redbook — provide an early (if limited) look at the month’s consumer spending as well as a glimpse of January’s spending trajectory. Anecdotal reports suggest that December — the capstone month of the all-important holiday shopping season — was not so strong, although the deep discounts offered by retailers has made the data difficult to interpret. In last week’s report, both the ICSC-Goldman Sachs same-store sales index and the Johnson Redbook index showed that December’s results would likely be soft when compared with November. But, nevertheless, the indices were gaining momentum. However, for the week ended January 4, the two indices changed course, posting slower or negative growth.
Pulling back significantly from the previous week’s week’s 1.0 percent week-over-week increase, the ICSC-Goldman Sachs index plummeted 5.4 percent in the fifth week of December, thanks in part to the frigid weather in the Midwest and Northeast. On a year-over-year basis, growth continued to expand but at far slower pace. The index posted a 1.7 percent gain compared to the previous week’s 3.0 percent increase. Retailers’ widespread use of promotions were also responsible for the depressed results, according to Michael Niemira, ICSC’s vice president of research and chief economist. Still, ICSC Research expects same-store sales to have rise between 4.0 percent and 4.5 percent in December, compared to earlier expectations for growth between 3.0 percent and 4.0 percent.
Johnson’s Redbook index also suffered from the promotions retailers used to clear seasonal inventories, although it was trending significantly higher than the weekly ICSC-Goldman index. The index has expanded 4.1 percent over the past 12 months, which compares with the previous week’s 4.5 percent rate of growth. But Redbook’s monthly comparison improved, contracting at a 0.6 percent rate following the previous week’s 0.7 percent rate of contraction.
It is important to note that while both indices posted slower or negative growth for the final week of December, that movement does not necessarily have negative connotations for consumer spending. Lower spending for the week ended January 4 was a function of both promotions, which will squeeze retailers margins, and of the poor weather.
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