Economic trends is a term heard weekly; daily when the economy is in trouble. Understanding what these trends indicate and how to decipher them helps better educate consumers about the economy and trends in consumer spending habits.
Available Cash and Credit
Trends in consumer spending habits are often affected by the amount of cash and credit available to the general public. When available credit and cash decrease, spending decreases. In the first decade of the 21st Century consumer credit was used by a far greater extent over available cash for purchases. The habit of "spending now and paying later" became the fuel for the economy. When the use of credit outpaces the use of available cash reserves an economic bubble is created in the form of an inflated economy. When available credit is decreased or the ability to pay for credit decreases the economy halts growth to return to previous levels that would be normal in a balanced economy.
Emotional Responses Regarding Economic Trends
The emotional response to economic trends impacts the trends in consumer spending habits. When the economy is perceived as good, spending increases, which then continues the economic growth. Spending is fueled by a positive outlook because people see an abundance of resources. When spending increases, production increases, which generates additional financial resources. When these resources begin to decrease, the emotional response turns negetive. This negetive response causes consumers to slow or even stop spending; when spending decreases production is slowed, and the cycle reverses to a downward spiral. This downward trend stops when consumer confidence is returned; this confidence is an emotional response to a perceived economic stability.
Employment Stability & Outlook
Employment is fueled by production. Production is fueled by spending. Trends in consumer spending habits can directly impact employment stability via production levels. If the trend is toward decreased spending, production levels drop which then impacts employement or the potential for future employment. Negative impact upon employment signals a decrease in earning and income; this drop in income is what can cause further trends in decreased consumer spending. Habits such as these are what led to the bankruptcy of General Motors in 2009. When available credit for new housing dried up, construction and related jobs also were cut. When these jobs were no longer available, spending halted for large items such as automobiles. This caused a drop in production of the auto industry, and resulted in a huge decrease in available income from these drops in production. The result was the largest employment drop since the 1930s.
Need vs. Want vs. Impulse Purchase
While trends in consumer spending habits are fueled by purchases, the types of purchases should be understood to comprehend shifts in the economy. There are three types of purchases - needed items, wanted items and impulse buying. Needed purchases are items such as food, housing and fuel costs. Wanted items are things such as brand name items, exotic foods, large electronics or items purchased new which could have been purchased as used such as cars. Impulse buying occurs when an item is neither a need nor a long term want, but is purchased without thinking of long term goals; examples include items bought from QVC or as a direct result of an advertisement offering discounts for a limited time. A balanced economy is where these three types of purchases are proportionate where needs are met, followed by wants with extra income used for impulse purchases. When wants and impulse buying outrun needed purchases the economy begins to run on borrowed money, or increased credit, in the form of using needed items as collateral; examples are second mortgages and refi loans. This is what happened with the housing boom of 2001 which led to the collapse in 2008.
Trends in consumer spending habits are measured by many different methods and organizations. The U.S. Bureau of Labor Statistics uses trends to gauge employment. Organizations such as Gallup and Nielson use trends to track consumer confidence and spending. The Federal Reserve uses trends to predict interest rates and credit availability. These trends, when combined into different forms of analysis, show the state of economic stability.
Reference Material Provided By:
Reuters: Consumer Spending Up Again (March 1, 2010)
U.S. Bureau of Labor Statistics: Consumer Expenditures (2008)