Current economic conditions and trends

Economics

In the last quarter, consumer spending increased 2.4% and both retail and vehicle sales increased in September as well. This contradicts the data on consumer confidence that shows Americans are worried about a number of economic issues. This discrepancy is explained a couple of ways. One is that the issues that affect consumer confidence are more of a long-range nature. The long-term budget outlook does not affect may be concerned but it does not affect spending. Similarly, problems with the euro may be a concern but are distant for the average American. The other explanation is that the upper quintile of the population accounts for half of all consumer spending. Therefore, as long as this group is confident enough to spend, consumer spending can rise while confidence wanes. A survey of consumer confidence would therefore need to include the wealth proportionally in order to accurately reflect consumer spending levels.

According to the model of aggregate demand, an increase in consumer spending should increase both aggregate expenditures and aggregate demand in the economy. Such an increase could even spur business investment increase supply or productivity. The real GDP would theoretically rise with an increase in consumer spending, all other factors held equal. More likely is that increased demand would spur higher levels of business investment and give the government more tax revenue that it would no doubt spend as well.

For the government to spur an increase in consumer spending and consumer confidence, a couple of types of fiscal policy can have an impact. Reducing taxes among those with tight budgets would spur spending, since a lack of confidence and tight budgets combine to create pent-up spending demand. Lower taxes would free up cash among such individuals, allowing them to spend more. Taxes on the wealthy will not have the same impact because more of that money will be saved.

Another fiscal policy that could be implemented is for the government to spend more, thereby increasing aggregate demand. This may have an impact on consumer confidence about the long-run state of the economy, but those long-run concerns are not driving consumer spending today. At this time, the spending policy is something that government can pursue. If poorly targeted, however, its impacts will be temporary. Indeed, if everybody knows that the measure is temporary, this will not affect consumer confidence or business investment in the long run. However, if the policy appears permanent, then the responses could be more permanent in nature as well.