Money, Money, Money (and why spending it matters)
By: Nataly Lozano
Just when I was ready to stop using retail therapy as a coping mechanism, I learned that consumer spending is the most significant contributor to the U.S. GDP. It makes up about 68% of the U.S. economy, according to The White House.
While I can’t recommend spending your life savings on an impulse purchase, it’s important to understand that consumer spending is a natural (and important) part of the United States economy—so long as you are not breaking the bank.
Consumer spending shows how well our economy is doing. Typically, when wages and jobs increase, spending increases with them. Although it is often unpredictable, periods of high economic growth rely on high consumer spending, which leads to price increases, more commonly known as inflation.
I know what you’re probably thinking. Isn’t inflation a bad thing? While inflation can be distressing, it makes consumers want to buy things NOW instead of waiting for a better deal. I know, it still doesn’t seem like a good enough reason for prices to go up, but think of the consequences of constant deflation.
If you were thinking of buying a new blender but realized that prices were expected to go down significantly, you would probably wait to buy it so you could get it cheaper. Usually, deflation keeps consumers waiting for the lowest possible price. Unfortunately, for an economy like the United States, which is highly dependent on consumer spending, waiting could have negative consequences, leading to lower economic growth.
Consumer spending is usually tied to consumer confidence. Although it has its quirks and idiosyncrasies, it helps give us glimpses of where our economy is headed.
For a long time, economists predicted that the United States would go into a recession by 2023. However, recently we’ve had a lot of contributions from the entertainment industry, which might have kept feelings about the economy fairly neutral.
Take, for example, the summer trifecta: Beyoncé, Barbenheimer and Taylor Swift. Together, they’ve contributed a total of about $8.4 billion to the economy, according to CNBC.
Many people were willing to spend over $1000 on concert tickets, food, hospitality and clothing (you can’t possibly go to a Beyonce or Taylor Swift concert and not dress the part). The problem comes when the credit card bill arrives and people start to wonder when concert tickets ever got so expensive.
CNBC stated that by Q4, the U.S. will experience the overinvestment effect, which basically means that we will have to go through an economic slump to make up for the “boom” (or the period of economic expansion). They claim that eventually the concerts will end and theater viewership will decline.
Morgan Stanley said they are raising their forecasts for real GDP growth by 0.9 percentage points in 2023 to 1.3% for the fourth quarter. However, consumer spending will shrink, causing prices to go down and leading to a rise in savings rates. Additionally, student loan repayments, which had been put on hold, will cause people to deter consumption for the rest of the year.
Remember, the economy is growing, as you noted in the previous graph. Despite the economy not declining enough for the Federal Reserve to start cutting rates, inflation and employment rates are falling. If that sounds like a scary thought (because consumer spending is the driving force in the U.S. economy), then think of our economy as a rollercoaster. There will be periods when you are high in the air and feel a frisson of anticipation, but there are also sobering periods when your feet are on the ground and you can finally breathe.
